Riksbank governor: On track for cutting interest rates in Sweden
Chances are good for Sweden’s Riksbank to begin cutting interest rates as soon as May or June. That was Riksbank Governor Erik Thedéen’s message to institutional clients gathered at a recent Nordea event in Copenhagen on the Swedish economy and monetary policy.
“If prospects for inflation remain favourable, we might cut in May or June,” he said, reiterating the central bank’s message from its March Monetary Policy Report. He added that while the bank is still data dependent, it is more comfortable now that inflation is “moving in the right direction.”
Most of the domestic factors in the Swedish economy have normalised. Inflation is still relatively high in the service sector, but that’s balanced out by lower inflation on goods. He described the Swedish economy overall as stable, but “very weak” in parts, for example, in the housing sector. The weakest parts are the most interest-rate sensitive, he said.
Yet the global and Swedish economies have been surprisingly resilient, not least in their labour markets, according to Thedéen. He noted that better prospects in the US mean more global demand and a weaker SEK.
Risks to the inflation outlook
Thedéen emphasised that the central bank’s favourable inflation forecast was based on favourable assumptions, including a stronger SEK and no new supply shocks. Geopolitical tension, such as conflict in the Middle East and war in Ukraine, could give inflation a second wind.
There’s a lot of uncertainty. So it’s wise to do this in a fairly gradual manner so we can actually read what’s going to happen in the economy as we lower interest rates.
“We should remember that the inflation uptick from the very beginning was to a large extent actually driven by supply effects caused by geopolitical risk,” he said.
Thedéen also pointed to a weaker SEK and companies’ pricing behaviour as additional risks to the inflation outlook. While companies’ pricing plans have come down, will they remain stable if the SEK weakens? Or will companies factor a weaker SEK into higher pricing?
In addition, there’s a risk that the Riksbank simply talking about lowering interest rates could trigger a so-called “ketchup effect,” driving demand, for example, in the housing sector. There’s a “risk that this will come too fast in an economy where supply is not meeting demand,” Thedéen said.
He emphasised that while the Riksbank may lower rates in May or June, the path would be a gradual one.
“There’s a lot of uncertainty. So it’s wise to do this in a fairly gradual manner so we can actually read what’s going to happen in the economy as we lower interest rates,” he said.
Asked by Nordea host and economist Torbjörn Isaksson to reflect on his time as Riksbank governor since he started at the beginning of 2023, he responded: “Fascinating, important and fairly hectic.”
The Riksbank will hold its next monetary policy meeting in May.
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