The SEK moves lower as May rate cut remains on the table

Riksbank refrained from repeating last week’s SNB shocking move and kept the policy rate at 4 pct. Nonetheless, a dovish statement and downward revision of forecasts indicate the door to the May cut remains wide open. The Swedish Krona, which depreciated over 3 pct against the euro this year, moved lower after the decision. The EURSEK exchange rate rose 0.2 pct to test 11.50 for the first time since November 2023.

Exactly two years after the start of the tightening cycle, the Riksbank is evidently laying the ground for an imminent easing as price pressures are abating quickly in a recession-struck economy. In February, the annual CPI rate declined to 2.5 pct, and core inflation slowed to 3.5 pct y/y. Consequently, the markets perceive Riksbank as the most likely G-10 central bank to follow the SNB and start cutting rates before the Fed and the ECB. Before today’s decision, markets saw almost 70 pct chances for a May cut.

The projections from November 2023, assuming that cuts will not be initiated sooner than in 2025, quickly became outdated. Revised interest rate forecasts show that the Riksbank will inevitably start the easing cycle in the first half of this year. The market prices in three rate cuts for the remainder of 2024. Whether the first cut will be made in May will depend on the March inflation figures, as the April data will be published after the next meeting on 8 May. A further undesired depreciation of the SEK may also defer the start of easing. However, the Swedish currency valuation already reflects the prospect of rate cuts. Bearing that in mind, fintech Conotoxia’s forecast assumes that the EUR/SEK exchange rate will weaken slightly over the remainder of the year and recover below 11.00, as the global easing cycle and accelerating economic growth should favour riskier, pro-cyclical currencies.