Riksbank Pauses Rate Hikes Unexpectedly

Sweden’s central bank unexpectedly paused its monetary policy tightening but expressed willingness to raise the interest rate further if the inflation outlook deteriorate.

The executive board of Riksbank decided to leave the policy rate unchanged at 4.00 percent, confounding expectations for an increase of 25 basis points.

The bank had started the latest tightening cycle in May 2022, when the policy rate was just zero.

“The Executive Board assesses that monetary policy needs to be contractionary and is prepared to raise the policy rate further if inflation prospects deteriorate,” the Riksbank said in the statement.

The bank’s forecast suggests that the policy rate is likely to be raised further at the start of the next year.

Riksbank also sees the need for the policy to be contractionary for a relatively longer period for inflation to fall back and stabilize close the 2 percent target.

Despite the hawkish comments from Riksbank, Capital Economics’ economist Andrew Kenningham said the next move will be a rate cut next May.

The economist expects the bank to cut rates steadily over the rest of 2024 and 2025.

The central bank said it is considering increasing the pace of sales of government bonds and the decision will be taken at the January meeting.

The lower economic activity together with an expected strengthening of the krona exchange rate will help inflation to fall towards the target during the course of next year, the bank reckoned.

The inflation outlook for this year was retained at 8.6 percent, but the projection for 2024 was lowered to 4.4 percent from 4.6 percent.

Inflation is seen at 1.8 percent at the end of forecast period.

The Swedish economy is expected to shrink 0.7 percent in 2023, which was upgraded from the 0.8 percent fall previously estimated.

In 2024, the decline in GDP is seen at 0.2 percent compared to the previous forecast of 0.1 percent drop. At the end of 2026, growth is projected to be 2.6 percent.

The interest rate path indicates that the policy rate will peak at 4.1 percent next year and reach 3.5 percent by the end of 2026.

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