On December 14, new data revealed a faster-than-expected drop in Swedish inflation for November, suggesting a potential conclusion to the era of interest rate hikes and raising speculation of an early policy cut by the Riksbank in the coming year.
The Statistics Office (SCB) reported that consumer prices in Sweden, adjusted for a fixed interest rate, rose by 3.6 percent compared to the same period last year, falling below analysts’ predictions of 3.9% but aligning with the Riksbank’s forecast.
When excluding the influence of volatile energy prices, a metric currently emphasized by the central bank, inflation stood at 5.4%, significantly lower than both the Riksbank’s targeted 2 percent CPIF inflation and market expectations of 5.9%. In October, these figures were 4.2% and 6.1%, respectively.
Swedbank expressed in a note that if this trend indicates the beginning of a more pronounced downturn in inflation, they are more inclined to support their initial prediction of a Riksbank rate cut in June. Moreover, they acknowledged the emerging possibility of an even earlier cut.
During its most recent meeting in November, the Riksbank, while maintaining the policy rate at 4.00%, hinted at the potential for further hikes if the inflation outlook deteriorated. However, even without additional hikes, the central bank anticipates keeping rates at the current level well into 2025, emphasizing the need for certainty in controlling inflation.
Despite the Riksbank’s stance, the markets, buoyed by the optimistic inflation data and a strengthened crown currency, are now pricing in a complete 25 basis point cut by June next year (EURSEK=, 0#RIBA=).
This shift in the inflation landscape adds an intriguing dimension to the monetary policy outlook, with both the European Central Bank and the Federal Reserve in the United States anticipated to act swiftly to reduce borrowing costs in the near future.