(Bloomberg) -- The Riksbank kept borrowing costs unchanged and said it expects to resume easing again with as many as three cuts in the second half of the year. 

The Swedish central bank, which held its interest rate at 3.75% in a decision announced on Thursday, said that consumer-price growth is turning out largely as it anticipated, allowing for further reductions in the benchmark in due course. The krona weakened.

“We have entered a new phase for monetary policy, as inflation has subsided and the economy is weak,” Riksbank Governor Erik Thedeen said at a news conference in Stockholm. “If inflation prospects remain intact, the rate could be cut two or three times during the second half.”

Thedeen has previously signaled a cautious approach to easing, and officials said on Thursday that they still see the need to act “gradually.” Even so, with the Swedish government declaring victory this week in the fight against inflation, the decision suggests the central bank’s confidence in that conclusion is growing too.

The prospect of further easing chimes with that of the euro zone. Finnish central bank Governor Olli Rehn said in an interview released on Wednesday that market bets for two more rate cuts by the European Central Bank this year are fair.

The Swedish krona fell as much as 0.4% to 11.3440, its lowest in more than two weeks versus the euro.

The krona gained as much as 4% against the euro following the central bank’s policy meeting in May, as it had said that the threshold would be high for a cut this month.

What Bloomberg Economics Says...

The Riksbank’s surprising guidance of adding the possibility of a third rate cut in the latter half of the year — while other major central banks deliver messages of hawkish leaning — risks inviting currency weakness.

—Selva Bahar Baziki, economist. For her SWEDEN REACT, click here

Thedeen said that while currency gyrations remain a risk, they shouldn’t determine monetary policy. He added that the krona’s strengthening after the May cut somewhat encouraged the bank to move toward further easing. 

All economists surveyed by Bloomberg had forecast the bank to stay its hand after the governor had clearly indicated that rate cuts won’t resume until the second half of this year. Last month, officials reduced borrowing costs for the first time in eight years. 

Par Magnusson, a strategist at Swedbank, said that the decision cements the prospect of further easing much more than peers such as the ECB are signaling.

“The relative high confidence in its own policy path exuded by the Riksbank sets it apart,” he said. “The bar for the Riksbank to not deliver on its ‘promised’ cuts is thus set a good deal higher than the bar for the ECB to not deliver on cuts it hasn’t promised.”

The Swedish central bank didn’t specify when it might cut again. The first opportunity to do so would be at its forthcoming announcement on Aug. 20. Robert Bergqvist, an economist at SEB, observed that the next consumer-price release on July 12 will be key in determining such a move.

Following a string of inflation outcomes below the central bank’s forecasts, a gauge of underlying price increases unexpectedly picked up in May, when hotel costs were boosted by visitors flocking to Stockholm for Taylor Swift concerts and to Malmo for the Eurovision Song Contest. 

The May data illustrate that while inflation risks have decreased somewhat, “the journey toward 2% inflation doesn’t follow a straight line,” Thedeen said. “Changing inflation and economic prospects both in Sweden and abroad mean that it’s wise to take the rate lower at a gradual pace.”

The Riksbank still believes that consumer-price growth will continue its downward trajectory. The CPIF measure that it targets is seen below its 2% goal in 2025, at 1.8% — slightly lower than previously forecast.

Sweden’s economy is more sensitive to monetary policy shifts than many European peers as rates are often fixed on relatively short terms, and the prospect of easing has led to improved sentiment in the Nordic economy. 

After a slight contraction in 2023, the Riksbank now expects Sweden’s economic output to expand by 1.1% this year. That’s better than its last forecast in March for 0.3% growth.

--With assistance from Naomi Tajitsu, Joel Rinneby, Harumi Ichikura, Stephen Treloar, Alastair Reed, Christopher Jungstedt, Love Liman, Christian Wienberg and Zoe Schneeweiss.

(Updates with Thedeen starting in third paragraph)

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