MNI RIKSBANK WATCH: Riksbank Seen Cutting 25BP
MNI (LONDON) - The Riksbank looks near certain this week to deliver the 25-basis-point-cut to 2.5% that it signalled in November, and appears to be on track to take the policy rate to at least the mid-point of its new assessment of the neutral range.
In November the Executive Board cut the policy rate 50BP to 2.75% and stated that if the outlook for economic activity and inflation remained unchanged it may cut again in both December and the first half of 2025. On Nov 26, Deputy Governor Anna Seim presented the RIksbank's new research on the neutral rate, putting the range at 1.5% to 3%, one percentage point lower than its previous range, published back in 2017.
The Riksbank could also tighten up guidance on the timing of its next hike, shifting it to Q1 rather than H1. September’s quarterly forecasts showed the policy rate dropping precisely to 2.25% and December’s updated forecasts in the round may point to it settling there or lower, and to another cut following this week’s.
The Riksbank stresses, however, that the latter stages of its three-year rate projections are model based rather than policymakers' judgement. Speaking to MNI following September’s decision, Governor Erik Thedeen made clear that it would be a matter of trial-and-error to see how the economy reacts to rate cuts around the neutral rate, and that estimates of this level are uncertain. (See MNI INTERVIEW: Inflation Confidence Key To Fast Cuts -Thedeen )
Market pricing suggests the policy rate will drop below 2.25%, with analysts splitting between 1.75% and 2.0% as the cycle low, but it would be a surprise if the Riksbank's own rate projection this month goes down to anything more than a little below.
INFLATION EDGES UP
Inflation on the target CPIF measure, consumer prices with a fixed interest rate, was 1.8% on the year in November compared to 1.5% in October, still below the 2.0% target but above the Riksbank's forecast.
The Riksbank has downplayed the significance of the recent up and downs on the headline reading, with Deputy Governor Per Jansson saying in a late November speech that excluding energy prices inflation has been close to 2% for almost six months, which would be in line with target.
Policymakers have been worried, though, about economic and krona weakness. The September forecasts showed 2024 growth of 0.8% and 1.9% in 2025 but softness in recent activity data suggest the 2025 estimate is more likely to be revised down than up.