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Swedish central bank flags good chance of cut in May if inflation eases

Published 03/27/2024, 04:37 AM
Updated 03/27/2024, 08:50 AM
© Reuters

By Simon Johnson

STOCKHOLM (Reuters) -Sweden's central bank held its key rate at 4.00% on Wednesday, as expected, and said that if inflation continued to drop toward the 2% target there was a good chance of a series of rate cuts starting in May.

With inflation seemingly tamed, central banks around the world are weighing up when to start easing policy. The Swiss National Bank was the first out of the blocks last week, with the U.S. Federal Reserve and the European Central Bank expected to follow suit in June.

After peaking at over 10% in late 2022, headline inflation in Sweden is close to target and the Riksbank is almost ready to start reversing two years of policy tightening.

"What we are saying is that if our forecasts in a broad sense turn out to be right, there is a high chance there will be a cut in May," Governor Erik Thedeen told reporters.

The central bank's rate path gives a roughly 50% chance of a cut in May and a total of three rate cuts this year.

Many analysts believe inflation will fall faster and that the Riksbank will speed up rate cuts.

"We stick to our call that the Riksbank will start cutting rates in May," Nordea economist Torbjorn Isaksson said. "We see the policy rate at 2.50% at year-end 2024."

The last time the central bank reduced rates was in 2016.

CAUTION

The Riksbank's outlook has shifted radically in the last few months. In November, it warned rates could rise further but said in February that it might be possible to relax policy in the first half of the year.

Thedeen said it had been too early to cut at Wednesday's meeting and the Riksbank "wanted to be even more sure" inflation would remain low and stable. Rates are likely to come down gradually, he said.

The central bank is worried, however, that the prospect of lower borrowing costs could prompt a spending spree by households.

"To a certain extent it is good that we get improved demand and purchasing power when rates go down, but we don't want it to go too fast so we get setbacks," Thedeen said.

Easier policy could also further weaken the Swedish crown, pushing up import prices.

© Reuters. A view of an entrance of Sweden's central bank in Stockholm, Sweden, August 12, 2016. REUTERS/Violette Goarant/File Photo

Analysts in a Reuters poll had forecast no change in rates this month, and for the central bank to flag a cut in May or June.

The Riksbank announces its next monetary policy decision on May 8.

(; editing by Mark Heinrich)

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