The Riksbank resumes rate cuts, but refrains from a 50 pb reduction

The Riksbank lowered its main policy rate from 3.75 to 3.50%. Policymakers opted to stick to gradualism, even though the market was pricing in a bolder move of 50 basis points. Monetary easing began in May, making Sweden the second developed country to cut borrowing costs after Switzerland. In June, the Riksbank paused the cycle but committed to three rate reductions over the rest of the year. Market participants expect policymakers to lower rates at each meeting in September, November and December.

Most price pressure metrics are running at levels close to the 2 percent target. In July, the favoured CPIF inflation stood at 1.7 percent y/y, only a tad below the June official projections, yet core CPIF excluding energy was in line with forecasts at 2.2 percent y/y. The overall picture of the economy is worrisome and warrants more easing. Consumption remains in the doldrums, and GDP growth is set to account for about 0.5 percent y/y in 2024. Private spending has decelerated since the start of the year as the pick-up in real wages is overshadowed by the rising unemployment rate. The economic activity is weak but has not been sharply deteriorating, consequently undershooting Riksbank’s expectations.

The fundamental weakness of the SEK and its vulnerability to the shifts in global sentiment will continue to impact the future decisions of the Riksbank as further depreciation could lead to higher inflation. In August the EUR/SEK exchange rate drifted ca. 3 percent lower and retraced below the 11.50 handle. After today’s decision EUR/SEK remained stable. Fintech Conotoxia forecasts assume the Swedish krona will continue to recover in the remainder of the year on the back of improving global risk sentiment. Moreover hefty market pricing of looming rate cuts should limit the downside for the currency. Consequently we expect the EUR/SEK to reach 11.00 before the year-end.