ING analysts project that Sweden's central bank, the Riksbank, will lower interest rates twice more, including a cut expected this month. This anticipation comes as Sweden's economy, which is particularly sensitive to interest rate changes, begins to show signs of recovery after being significantly impacted by the rate hikes throughout 2022 and 2023.
The Riksbank has already reduced rates by a total of 150 basis points, a move that is starting to yield positive results. Various sentiment indicators, ranging from consumer confidence to the economic tendency survey, have demonstrated consistent improvements throughout 2024.
The housing market in Sweden is also experiencing a resurgence, attributed in part to the country's high prevalence of variable-rate lending. This financial structure means that the effects of rate changes are felt more quickly in Sweden than in nations with a greater proportion of fixed-rate debt, such as the United States.
Despite these optimistic signs, the hard economic data has yet to fully reflect the upswing. Unemployment rates have ceased climbing but are still relatively high, remaining above the average levels seen before the Covid-19 pandemic. Household consumption saw an uptick in November, but it is premature to declare this the beginning of a sustained trend.
The Riksbank is hopeful for a recovery in demand during the current year, but it is still considered the early stages of recovery. Furthermore, inflation has persistently fallen short of the Riksbank's predictions. In December, the Consumer Price Index-Fixed (CPIF) excluding energy was reported at 2%, which was below the central bank's most recent forecast.
Adding to the cautious approach is the potential risk posed by US President Donald Trump's trade policies, which could impact Sweden's export-driven economy. With these factors in mind, ING analysts suggest there is 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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