MNI RIKSBANK WATCH: Cuts 25bps, Endorses Just One More Cut
MNI (STOCKHOLM) - The Riksbank cut its policy rate 25 basis points to 2.5% on Thursday but it suggested it is close to the end of the easing cycle, with its guidance stating that the next cut will come in the first half of next year and its forecasts showing 2.25% is expected to be the trough.
The cut had been clearly signalled, but the focus ahead of the decision was on whether the Swedish central bank would show more than one more cut this cycle, with some analysts predicting that the policy rate would head on down to 2%. Instead, the Riksbank's in-house rate projection showed it hitting a floor of 2.25%, the mid-point of its new estimate for the neutral range.
The detailed rate projections pointed to Q1 as the most likely time for the next reduction in rates, with Governor Erik Thedeen noting at the press conference that January is very close, suggesting a March cut is probably on the cards.
In an MNI interview Thedeen said that the Riksbank was not using estimates of the neutral rate to steer near-term policy and that he believed that the risks around the rate projection were balanced. While the downside scenario was for further lower inflation with globalisation enduring and a fairly wide output gap opening, the potential for high U.S. inflation and growth weighed in the other direction. (See MNI INTERVIEW: Riksbank Head Sees Policy Risks Balanced)
The Riksbank's forecasts showed inflation on the target CPIF, consumer prices with a fixed interest rate, measure at the 2.0% target in 2025, dipping only slightly to 1.9% in 2026 and back at target in 2027, with the 2025 forecast up 0.4 percentage point.
GDP growth was forecast to rise to 1.8% next year from just 0.6% in 2024 and to rally to 2.6% in 2026.
Thedeen said the Riksbank could not know where the precise neutral rate was and would have to watch incoming data to gauge the stimulative effect of policy. Krona weakness remains a concern but Thedeen highlighted how little currency rates appear to have been driven by interest rate differentials.