Riksbank expected to maintain 2% policy rate at upcoming meeting

Capital Economics anticipates the Riksbank will maintain its policy rate at 2% at its next meeting, despite previous indications of further easing, as recent inflation (CPIF at 3.0% in July) has exceeded forecasts and some economic indicators show resilience. This suggests policymakers will likely await clearer signals before considering additional cuts, with the analyst firm projecting the bank will hold steady as the economy recovers and past easing effects continue to work through the system.

Analysis

Capital Economics projects that Sweden's Riksbank will maintain its policy rate at 2% in its upcoming meeting, adopting a more hawkish stance than previously signaled. This follows a 25 basis point cut in June, where the central bank had indicated a probability of further easing later in the year. The primary driver for this expected pause is inflation data that has significantly overshot the Riksbank's own forecasts; CPIF inflation, the target measure, rose to 3.0% in July against a 2.5% projection, while the core measure excluding energy hit 3.1% versus a 2.8% forecast. This inflationary pressure is occurring amid a mixed economic environment. While preliminary Q2 GDP growth was minimal at 0.1% quarter-over-quarter and household consumption rose just 0.2%, countervailing data points to economic resilience. Notably, industrial production increased significantly in the second quarter, and consumer confidence rose substantially in July. With the effects of 150 basis points in rate cuts over the past year still permeating the economy and the policy rate now considered neutral, policymakers are expected to await clearer economic signals before committing to further easing, especially as the economy is forecast to recover in the coming quarters.

Key Decisions for Investors

• Given the expectation for a hawkish hold from the Riksbank, investors should anticipate potential near-term strength in the Swedish Krona (SEK) as rate cut expectations are pared back.
• Bond investors should note that yields on short-term Swedish government debt may face upward pressure or stabilize, as the prospect of further rate cuts in 2024 diminishes.
• For equity investors, the pause in easing could temper performance in rate-sensitive sectors, but the underlying economic resilience in industrial production and consumer confidence may support cyclical stocks sensitive to domestic demand.