Riksbank keeps policy rate at 4%

Sveriges Riksbank kept interest rates unchanged at 4% at its monetary policy meeting today (November 23).

The executive board unanimously supported the decision, even though inflation remains over the 2% target and most analysts expected a 25 basis points increase.

This has been interpreted as a dovish decision. Most observers think the Swedish central bank has reached the terminal rate and will not increase the policy rate again in the cycle.

“It is surprising that [Per] Jansson but also [Aino] Bunge didn’t enter reservations for a higher policy rate,” says Torbjorn Isaksson, chief analyst with Nordea.

It is surprising that [Per] Jansson but also [Aino] Bunge didn’t enter reservations for a higher policy rate

Torbjorn Isaksson, Nordea

“We believe that the Riksbank now has finished hiking, even if the policy path still signals some probability of another hike,” says Olle Holmgren, chief strategist for Sweden with SEB bank.

The policy statement warns that “monetary policy needs to be contractionary and [the bank] is prepared to raise the policy rate further if inflation prospects deteriorate”.

However, observers doubt that with falling inflation and a weaker economy the Riksbank will be able to tighten policy further.

“We would be very surprised if it does so,” says Andrew Kenningham, chief Europe economist with Capital Economics. “Instead, we think the next move will be a rate cut next May, and expect the bank to then cut rates steadily over the rest of 2024 and 2025.”

The consumer price index at a fixed interest rate (CPIF) increased year on year by 4.2% in October. However, this is way below the levels it recorded around a year ago. The CPIF peaked at 10.2% in December 2022.

Nonetheless, inflation ticked up from 4% in September, and the disinflationary process has become slower over the last few months. This development worries the Riksbank.

“Inflation is still too high and there are still risks that it will not fall fast enough going forward,” adds the policy statement. “Prices for services are increasing at a rapid pace and contributing significantly to total inflation,” it says. “In addition, the krona is still unjustifiably weak, which is holding up the rate of price increase for goods.”

The central bank forecast the CPIF will average 6% in 2023, up from the 5.9% it expected in September. But the CPIF is forecast to average 2.3% in 2024, down from 2.5% in September, and 1.7% in 2025, down from 1.8% in the previous forecast.

The policy rate is expected to average 4.1% in the fourth quarter of 2024, unchanged from September.

Faster QT

Rather than increasing interest rates, the Riksbank is more likely to tighten financing conditions, accelerating the pace at which it is removing liquidity from the financial system, or quantitative tightening. The central bank is already selling part of the bonds it purchased over the previous decade to boost inflation and support the economy through the pandemic.

And today it said it is “considering increasing the pace of sales of government bonds.” The policy statement adds “a decision on this could be made at the monetary policy meeting in January”.

“The Riksbank already planned to shrink its QE holdings to almost zero by the end of 2026 – much faster than other central banks, but this is likely to be even faster from January,” points out Kenningham. “This in turn means the bank will soon need to decide on the optimal ‘terminal’ size of the balance sheet.”