SWEDEN: Increasing Importance Of r* Discussions As Riksbank Easing Progresses

With the Riksbank expected to cut rates by 25bp at each of its three remaining policy rate meetings this year (to bring the year-end policy rate to 2.75%), and markets pricing almost 100bps of further easing in 2025, the neutral interest rate (r*) may become an important policy consideration in Sweden at an earlier stage than for other G10 Central Banks.

• Discussions around r* were fairly limited in yesterday’s Riksbank August meeting minutes, with only Deputy Governor Jansson making reference to the concept.
• Jansson noted that r* is “very important for how quickly one should now attempt to cut interest rates”, but re-iterated well-known issues/uncertainties around its estimation.
• The Riksbank’s March MPR included a discussion on the factors driving long-run interest rates globally and in Sweden but did not provide a point/range of estimates (in comparison to the Norges Bank, who estimated r* in Norway of between 0 and 1% in its June MPR).
• Although the Riksbank may provide a deeper analysis/estimate of r* in future MPRs, for now observers will need to rely on market/survey-based measures.
• The SEK 5y5y interest rate swap is currently 2.4327% (vs a YTD high of 2.9325% in April). This aligns with the 5-year ahead policy rate expectations from Prospera’s latest quarterly survey in June (of 2.4%).