MNI RIKSBANK WATCH: Talks Tough On Hikes But Holds Steady

Sweden’s central bank left its policy rate on hold at 4.0% at its November meeting, suggesting its tightening cycle may be over, though Governor Erik Thedeen insisted it stood ready to hike again if inflation pressures returned.

An updated policy path, retaining a 4.1% peak, left the door just open to another hike, but with the economy contracting and after this month’s opportunity to tighten was ignored, inflation would probably have to surprise clearly to the upside for the Riksbank to justify any further move.

"We have we have not lost the chance (to hike).. and we are very clear that we will hike again if ... inflation is not going in the right direction down to 2%," Governor Erik Thedeen said in response to a question from MNI at the press conference.

He justified the decision to leave policy on hold this month, saying officials detected "some positive signs when it comes to inflation pressures, inflation momentum."

The Riksbank's updated forecasts showed core inflation, on the CPIF measure excluding energy, falling below target in June 2025 in a central scenario, while the headline CPIF rate was forecast to be below the 2.0% target by January 2025 and to come in at 1.8% in calendar year 2025.

The growth forecast barely changed, nudging up to -0.7% from the previous quarter’s -0.8% for 2023 and down to -0.2% from -0.1% for 2024. The Rikbank thinks this economic contraction will feed through to higher unemployment than previously assumed, with joblessness expected to rise to 8.6% in 2024, revised up from 8.3%, and to 8.5% in 2025, up from 8.3%.

ALTERNATIVE SCENARIOS

Alongside its central projection, the Riksbank published two alternative scenarios, one where firms increase profit margins and inflation is higher than expected and a second where both GDP and inflation were lower due to weaker demand. In the latter scenario the Riksbank made clear that it would cut rates, although not immediately.

"The fact that the real economy and inflation are changing in the same direction ... simplifies the monetary policy trade-off: it clearly indicates a less contractionary monetary policy than in the main scenario," the Bank said in the Monetary Policy Report.

Even if demand is softer than expected the Riksbank still anticipated a period of flat interest rates before cutting begins, a shortened Table Mountain top outlook, following the recent significant overshoot in inflation.

"It is likely that the Riksbank would not immediately begin to cut the interest rate ... interest rate cuts will instead begin in the middle of next year," the report said, referring to the weaker scenario.