Riksbank pauses, rate cut looms in August

Sweden's Riksbank lowered its main policy rate in May from 4.0 to 3.75 pct. Consequently, it became the second G-10 central bank after the Swiss National Bank to embrace monetary easing. Unlike the SNB, it stayed put in June and kept the main policy rate at 3.75 pct today. The decision was in-line with the guidance from the previous meeting and market expectations.

However, the pause in the easing cycle will only last for a while. A worrisome macroeconomic backdrop argues for even three cuts in the year's second half. At today's meeting, the Swedish central bank lowered its inflation forecasts. The annual CPIF rate is now expected to fall to the 2 pct mark in 2024. This, combined with sluggish private consumption despite rapidly easing price pressures and a weak labour market, paves the way for a resumption of the rate-cutting cycle as early as the next meeting in August.

The most recent appreciation of the SEK is also a much-welcome development. The Riksbank had been a tad uneasy about cutting rates ahead of major central banks. It feared further weakening of the beleaguered currency could result in stickier inflation and consequently postpone delivering much-needed relief to the ailing economy. Quite surprisingly, since the May rate cut, the krona has outperformed the rest of the G-10 currencies.

The EUR/SEK rate managed to retrace from the multi-month highs and plummeted from the 11.80 area. The krona gained over 3.5 pct against the common currency. Fintech Conotoxia FX forecasts that despite domestic vulnerabilities, the Swedish krona will continue to gradually recover on the back of improving global sentiment and a pick-up in Eurozone economic activity. The EUR/SEK exchange rate is unlikely to fall towards the 11.0 handle before year-end.