Swedish Inflation Surprise Spurs Bets on Rate Cut Next Month

Sweden’s underlying inflation rate fell more than expected in March, fueling expectations for the Riksbank to start cutting interest rates ahead of major peers next month.

Sweden’s underlying inflation rate fell more than expected in March, fueling expectations for the Riksbank to start cutting interest rates ahead of major peers next month.

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A closely followed measure that strips out energy costs and the effect of interest-rate changes increased 2.9% from a year ago, a 26-month low, according to a statement from Statistics Sweden. That was less than the 3.2% expected by economists surveyed by Bloomberg as well as the 3.3% that the Riksbank projected.

The Swedish central bank has said it will probably start lowering borrowing costs either in May or in June. After the data published Friday, economists at DNB ASA and Svenska Handelsbanken AB changed their bets in favor of the earlier option.

“Price growth looks to have calmed to a satisfactory degree, indicating that the Riksbank is likely to cut in May,” DNB’s Oddmund Berg said in a note. “Although recent developments suggest that international rates could be expected to be a little higher than before, the trend in inflation has been convincingly weak, in our view.”

An early cut may look less attractive to the Swedish policymakers, however, if the Federal Reserve postpones its easing plans in the wake of a series of hotter-than-expected inflation readings. Any such policy shift by the US central bank stands to make the Swedish krona susceptible to weakening, which would fuel price increases on imported goods. 

What Boomberg Economics Says...

“The positive surprise from Sweden’s March inflation print cements our view that price gains will hover around 2.3% in the short term, before dipping below the Riksbank’s 2% target in June and then remaining below target until late 2025. The print adds to the case for an early interest-rate cut in May while risks still point to June.”

— Selva Bahar Baziki, economist. Click here to read more.

The latest data show that conditions are good for price increases to stabilize near the central bank’s 2% target, First Deputy Governor Anna Breman said in a speech in Stockholm. She still cautioned that a smooth return to sustainably low and stable inflation shouldn’t be taken for granted, as there is still a risk of setbacks.

“The krona remains a risk,” she said. “So far, it’s not looking good, and the level we are at now is bad, but it is manageable when considering Swedish inflation outcomes as well as other factors that are affecting price development.”

Read More: Riksbank’s Breman Lauds March Inflation Print, But Risks Remain

The krona weakened about 0.3% following the report, before paring losses to trade at 11.5177 versus the euro at 10:04 a.m. in Stockholm. 

Traders in overnight swaps now price in a 82% chance of a Riksbank reduction at the May meeting, compared with 43% seen a week ago.

“In our view the probability for a rate cut in May is very high,” SEB’s Olle Holmgren, Amanda Sundstrom and Marcus Widen said in a note. “The weak krona is likely to continue to be an uncertain factor, but after today’s low reading, the bar for when the exchange rate will prevent a May rate cut has risen significantly.”

Consumer sentiment in the Nordic country has strengthened recently, and housing prices have started recovering amid expectations of rate cuts. While that is good news for a rate-sensitive economy that shrank for three consecutive quarters in 2023, it has also made central-bank officials wary of the risk that reducing borrowing costs boosts spending and sets off another cycle of price increases.

Read More: Riksbank Chief Calls for Cautious Easing to Avoid Demand Surge

The Riksbank’s target measure for inflation, CPIF, also declined more than expected in March, printing just above the 2% aim at 2.2%. Food prices were 1% lower than a year ago, after rising more than 20% on an annual basis in early 2023.

“Today’s numbers show a clear inflation slowdown, and it has strengthened the view that conditions are in place for it to continue,” Breman told reporters after her speech. “It’s moving in the right direction, but it is always the broader picture that determines what decisions we make. I will still say that a cut is likely in May or June.”

With assistance from Joel Rinneby.

This article was generated from an automated news agency feed without modifications to text.