Riksbank Says Rate Cut Possibility In H1 Cannot Be Ruled Out

(RTTNews) - Sweden's central bank on Thursday left its key interest rate unchanged for a second straight session, as expected, and suggested that a rate cut would be possible in the first half of the year. The Executive Board of the Sveriges Riksbank, led by Governor Erik Thedeen, left the key policy rate steady at 4.00 percent. The Riksbank said the contractionary monetary policy is still necessary to stabilize inflation close to the target.

The previous move in the rate was a 25 basis point hike in September. Policymakers now assess that there is less risk of inflation becoming entrenched at levels that are too high and hence, the rate can probably be cut earlier than indicated in the November forecast, the bank said. "If the prospects for inflation remain favorable, the possibility of the policy rate being cut during the first half of the year cannot be ruled out," the Riksbank said.

The central bank pointed out that past rate hikes have contributed to pull inflation lower, and conditions are now right for low and stable inflation. However, the core inflation that excludes energy prices remain high, the Riksbank said.

Inflation expectations are close to the target and wages are increasing moderately, the bank added.

The Swedish central bank sought caution as policymakers saw risks of setbacks that could lead to a renewed rise in inflation. These include fresh supply shocks resulting from the geopolitical unease, company pricing behavior not yet having normalized, or the krona weakening substantially once again, the bank said.

"We would not completely rule out a first rate cut in March, depending largely on the January and February inflation data, but think May is still more likely," Capital Economics economist Andrew Kenningham said.

"We then anticipate rates falling by 100bp to 3.0 percent by the end of this year and to 2.5 percent by the end of next year - which is broadly what is priced into financial markets."