(Bloomberg) -- The Riksbank will probably keep to its own steady pace of easing this week and shirk from a bigger half-point reduction in borrowing costs like the one just made by the Federal Reserve.
Speculation that the Swedish central bank might follow its US counterpart with such a move to aid sputtering growth has been brewing for months, but all 23 economists surveyed by Bloomberg anticipate only a quarter-point interest-rate cut, to 3.25%, in its announcement on Wednesday.
“There is no economic or market data that should make the Riksbank concerned and prompt them to increase the pace,” said Christina Nyman, chief economist at Svenska Handelsbanken AB. “We forecast a 25 basis-point cut now, and similarly-sized cuts at this year’s two remaining meetings.”
Such an approach would reflect the “gradual” easing pledged by policymakers, and chime with a more cautious stance in Europe toward interest-rate reductions as compared to the Fed’s abrupt move last week.
After an uphill battle to tame consumer prices, the Riksbank’s concerns have now shifted to the health of the economy, where unemployment is rising and domestic demand remains weak.
Governor Erik Thedeen and his colleagues are questioning whether they’re doing enough to keep inflation at a level consistent with their 2% target, or if they could support a sluggish economy by moving faster.
With consumer-price growth slowing further below that goal, and minutes from their last meeting showing that a half-point cut was considered, the Fed’s reduction has raised the prospect of Sweden following suit.
While no economist predicts a bigger move this week, forecasters at Sweden’s largest bank, SEB AB, reckon that officials will increase the pace of easing before year-end. Strategists Olle Holmgren and Amanda Sundstrom say a half-point decrease is “definitely” in play already, even if that would jar with the policy message until now.
“It is a close call, but a 50 basis-point cut in September would be at odds with the signaling at the August meeting,” they said, citing minutes that showed a unanimous vote against it. “Uncertainty and predictability favored adjusting rates in 25 basis-point steps.”
Unlike August, this week’s announcement will come with a full set of updated forecasts for borrowing costs, economic output and other indicators.
The current guidance is that the rate will be reduced to either 3% or 2.75% by year-end, and most forecasters expect an indication that it will be at the lower of those levels at the start of 2025.
The krona, long a headache for the Riksbank as its weakness fueled import prices, is less of a concern this time. The currency touched an eight-month high against the US dollar on Monday, and is trading close to the bank’s forecast from June on trade-weighted terms.
What Bloomberg Economics Says...
“Alongside downward revisions to its inflation outlook and 2024 growth projections, we predict a shift in the rates path pointing to a higher likelihood of cuts in the remaining meetings this year. Moves larger than 25 basis points are a risk, but we think the probability is low. This is especially true for the September meeting, as the August minutes showed no support for such a move among board members.”
—Selva Bahar Baziki, economist
Instead, scrutiny of the decision may focus on how the Riksbank defines “gradual” easing. Board members have said that they view a pause in rate cuts along with a half-point reduction as consistent with that.
Nordea Chief Economist Annika Winsth is critical, and has called for clarity so the central bank avoids the risk that households and businesses misinterpret any signals.
Such messaging may matter more against the backdrop of an economic recovery struggling to take hold. While consumers are more upbeat, spending has yet to reflect that, and output from the private sector also remains subdued.
“Our companies speak clearly about a weak economy that is only recovering slowly,” Sven Olof Daunfeldt, chief economist at the Confederation of Swedish Enterprise, said alongside economic forecasts released by the national business lobby on Monday. “I am genuinely worried that the weakness has a firmer grip on the economy than we expected.”
Employers and labor unions have repeatedly called on the Riksbank to do more to support growth, and expectations for a larger cut increased somewhat after the Fed move. But Nyman at Handelsbanken wonders if the US reduction could even make the Swedes less likely to shift gears.
“It could lower the risk of a hard landing in the US,” she said. “With less concern about that, the Riksbank may not have to cut rates as rapidly.”
--With assistance from Harumi Ichikura.
©2024 Bloomberg L.P.