Sweden's Riksbank Policy Rate Outlook

Sweden's Riksbank is anticipated to lower its policy rate further to 2.5%, a move aligned with the consensus forecast. This follows a significant 50 basis point cut in November. The central bank, which had been aggressively reducing rates alongside the Bank of Canada, is seeing positive outcomes from its monetary policy adjustments.

Economic Recovery

The Swedish economy is experiencing a resurgence, particularly in the housing market, where floating-rate mortgages are prevalent. The reduction in interest rates has led to:
– A recovery in sentiment
– An increase in transactions
– A rise in house prices, which are now growing at nearly 8% year-on-year

Consumer confidence has soared back to pre-pandemic levels.

Employment Stability

Employment conditions in Sweden have shown signs of stability, with the unemployment rate ceasing to climb and redundancy levels plateauing. However, these levels are still slightly higher than pre-Covid averages. Despite these improvements, the Riksbank may not be ready to halt rate cuts, as the end of the cutting cycle could be approaching.

GDP Growth and Consumer Behavior

Sweden's economic growth remains modest, reflected in the latest GDP data. Although household consumption has been weak, improved consumer sentiment is driving some recovery. Inflation data has exceeded the Riksbank's earlier predictions from September, but expectations for a significant rise in 2025 remain low.

Upcoming Wage Negotiations

Upcoming spring wage negotiations are forecasted to align with the Riksbank's 2% inflation target, due to moderate inflation expectations from both employers and employees.

Global Trade Risks

Considering global trade tensions, particularly those stemming from Donald Trump's trade policies and Sweden's export-dependent economy, further rate cuts are projected. Analysts from ING predict not only a reduction this week but also two additional cuts next year, potentially bringing the policy rate down to 2%. The Riksbank's updated interest rate projection, expected later this week, is likely to mirror this trajectory.

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