Swedish inflation figures seal the deal for a May rate cut

In March, the preferred by the central bank's annual CPIF rate declined from 2.5 to 2.2 pct, the lowest level in almost three years. Monthly price increase with a fixed interest rate accounted for only 0.1 pct, down from 0.2 pct in February. Underlying inflation, excluding energy, declined from 3.5 to 2.9 pct y/y and slowed to the lowest since January 2022. Today's figures, the last readings ahead of the Monetary Policy Meeting planned for 8 May, came in below all estimates.

The Riksbank held the key rate at 4% in March, refraining from a surprise cut. Nonetheless, a dovish statement and downward revision of forecasts opened the door to the May cut wide open. From a broader perspective, price pressures in Sweden are decreasing faster than anticipated. Steady inflation expectations, weakness of economic activity and declining household consumption point to an imminent start of the easing cycle. March inflation figures sealed the deal for a reduction in borrowing costs at the next meeting. Consequently, the Riksbank is set to become the second G-10 central bank to initiate rate cuts.

It seems that only a further decline in the beleaguered SEK could prevent the Riksbank from cutting rates in May. The Swedish krona has depreciated by more than 3 percentage points against the euro this year. In April, the EUR/SEK exchange rate briefly rose to 11.60 for the first time since November 2023. However, the valuation of the Swedish currency already reflects the prospect of interest rate cuts. The markets have already priced in three 75bp rate cuts over the next 12 months. With this in mind, Fintech Conotoxia's forecast assumes that the EUR/SEK exchange rate will decline for the remainder of the year and recover towards 11.00, as the global easing cycle and accelerating economic growth should favour riskier, pro-cyclical currencies.