Will the Riksbank cut by 50 basis points?

The Riksbank’s press release after its Executive Board meeting in September highlighted that inflation pressures had fallen substantially and had become compatible with inflation around the 2% inflation target.¹ The release also stated that if the outlook for inflation and economic activity remained unchanged, interest rates may be cut at the November and December meetings. Indeed, it noted that one of these rate cuts could be 50 basis points. 

The Executive Board assesses the balance of risk to inflation and economic activity as being skewed to the downside and highlighted that it was therefore important that activity strengthened for inflation to stabilise close to the 2% target. Thus, an expansionary policy was called for. 

The reason the Riksbank has turned so dovish is that with plenty of debt at variable interest rates, the economy has been hard hit by the prior tightening of monetary policy to combat high inflation. As a result, consumer price index (CPI) inflation in Sweden has fallen to 1.6% year-on-year (YoY), with CPIF inflation at 1.1% YoY and CPIF ex-energy inflation at 2.0% YoY in September (see Chart 1).² These are low inflation rates from an international perspective.

Chart 1. Swedish inflation (% change, year-on-year) 

Source: Statistics Sweden. Data as at 28 October 2024.

Another consequence of monetary policy tightening in Sweden has been a gradual softening of the labour market, which is a good indicator of the level of economic activity. When the Riksbank started raising interest rates in May 2022 there was initially very little impact on the labour market. The unemployment rate then started to rise in the first quarter of 2023 and the employment rate started to decline in the third quarter of 2023 (see Chart 2). Since then, the unemployment rate has risen by more than 1% and the employment rate has declined by about 0.6%. Overall, the monetary policy tightening has had a marked impact on the tightness of the labour market.

Chart 2. Swedish unemployment and employment rate (%)

Source: Statistics Sweden. Data as at 28 October 2024.

The weakness of the real economy is apparent in the behaviour of the real gross domestic product (GDP) indicator (see Chart 3). Real GDP growth peaked in 2022Q2 when the Riksbank started to raise interest rates. It turned negative in 2023Q2 and reached a bottom in 2023Q3 with real GDP growth of -2.0%. The rate of contraction has slowed since real GDP has contracted over the last six quarters.

Chart 3. Swedish real GDP indicator (% change, year-on-year)

Source: Statistics Sweden. Data as at 28 October 2024.

In summary, inflation in Sweden is at target and real economic activity is soft, hence there is a significant chance that the Riksbank will cut by 50 basis points this week. Indeed, at the time of writing, markets assign a 51% probability to that outcome.³

¹ https://www.riksbank.se/en-gb/monetary-policy/monetary-policy-report/2024/monetary-policy-decision-september-2024/
² CPIF is the consumer price index with a fixed interest rate and is calculated using the same data and in the same way as the CPI, but without taking into account the effect of changed mortgage rates. https://www.riksbank.se/en-gb/monetary-policy/the-inflation-target/how-is-inflation-measured/
³ Source: LSEG Data & Analytics. Data as at 04 November 2024.