Sweden's Central Bank Hints at Potential Rate Cuts Amid Improving Inflation

Sweden's central bank maintained its key interest rate at 3.75%, signaling potential cuts later in the year if inflation continues to improve. The Riksbank forecasts three more cuts by 2025, aiming to lower the policy rate to 2.00%. However, cautious notes were struck due to global economic risks.

Sweden's central bank held its key interest rate at 3.75% as expected on Thursday, and said that if inflation prospects remained the same, the policy rate could be cut two or three times during the second half of the year. In May, when it cut the policy rate for the first time in eight years, the Riksbank had said it expected two more cuts in 2024, and the Swedish crown weakened against the euro on the more dovish tone from central bank.

"Given that inflation is fundamentally developing favourably, economic activity is assessed to be somewhat weaker, and the krona exchange rate is a little stronger, the forecast for the policy rate has been adjusted down somewhat," the Riksbank said in a statement. "If inflation prospects remain the same, the policy rate can be cut two or three times during the second half of the year."

Headline inflation, which peaked at over 10% late in 2022, is close to the central bank's 2% target and likely to fall further. The Riksbank cut its inflation forecast for this year to an average of 2.0% from 2.3%, and expects it to remain under the target level through 2026. Inflation averaged 6.0% in 2023.

In addition, the economy remained weak, with many households struggling with mortgage payments, making rate cuts a welcome prospect. "We stick to our forecast of three additional cuts this year, but bring forward the second cut to August," Swedbank said in a note. "We forecast that the policy rate will be cut to down to 2.00% by the end of 2025, which is our estimate of a normal level."

The Riksbank, however, also struck a note of caution. The pace of inflation picked up slightly in May, highlighting the risk for setbacks, while the start of policy easing in the United States has been delayed. The European Central Bank is also wary of sticky price pressures.

Sweden's neighbour Norway last week pushed back its prediction for a rate cut and now sees policy easing starting early next year. "There are risks linked, for instance, to inflation abroad, geopolitical unease, the krona exchange rate and the recovery in the Swedish economy that can lead to the policy rate being either higher or lower than forecast," the Riksbank said.

The central bank will announce its next policy decision on Aug. 20.

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