Sweden’s Economic Outlook

ING analysts project that Sweden’s central bank, the Riksbank, will lower interest rates two more times, with a cut expected this month. This anticipation arises as Sweden’s economy, particularly sensitive to interest rate changes, begins to show signs of recovery after significant impacts from rate hikes in 2022 and 2023.

The Riksbank has already reduced rates by a total of 150 basis points, a move yielding positive results. Various sentiment indicators, including consumer confidence and the economic tendency survey, have demonstrated consistent improvements throughout 2024.

The housing market in Sweden is also experiencing a resurgence, partially due to the country’s high prevalence of variable-rate lending. This financial structure enables Sweden to feel the effects of rate changes more quickly than countries with more fixed-rate debt, like the United States.

Despite these optimistic signs, hard economic data has yet to fully reflect the upswing. Unemployment rates have stopped climbing but remain relatively high, above pre-Covid-19 pandemic averages. Household consumption saw an uptick in November, but declaring this the start of a sustained trend is premature.

The Riksbank is hopeful for a demand recovery this year, though it is still early stages. Moreover, inflation has persistently fallen short of the Riksbank’s predictions, with December’s Consumer Price Index-Fixed (CPIF) excluding energy reported at 2%, below the central bank’s latest forecast.

Adding to the cautious approach is potential risk from US President Donald Trump’s trade policies, which could affect Sweden’s export-driven economy. Considering these factors, ING analysts suggest room for an interest rate cut next week and another later in the year, potentially bringing the policy rate down to 2%, slightly below the Riksbank’s projected rate for the year.

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