MNI RIKSBANK WATCH: Close Call, Soft Data Put Cut On Cards

Soft data have raised the possibility of a further 25-basis-point cut at the Riksbank Executive Board's June meeting, though the decision could be a close call.

The board appeared to have reached the trough of its easing cycle when it cut to 2.25% in January, but softer inflation and concerns over the implications of tariffs and heightened trade uncertainty for the export-driven Swedish economy, have opened the door to lowering the policy rate, with the central bank set to cut its near-term growth forecasts this month. Markets now see a June cut as more likely than not. (See MNI INTERVIEW: Riksbank Eyes Inflation Expectations - Jansson)

The March rate path, which showed the policy rate flat-lining at 2.25% throughout the three-year forecast, looks outdated. It will almost certainly be nudged lower in the June forecast round but it is unclear whether it will go much below 2%, and whether the Bank will place much likelihood on two cuts this year.

The flash reading for the target inflation measure, CPIF, came in unchanged at 2.3% on the year in May and 2.5% ex-energy, down 0.6 percentage point and below the Riksbank's 2.7% forecast. Q1 GDP fell 0.2% on the quarter compared to the central bank's March assumption of a 0.5% rise, highlighting the weakness of economic activity.

The board's May minutes, however, offered little clarity on the chances for a June cut.

Governor Erik Thedeen said that "economic activity abroad and in Sweden will probably become weaker, possibly significantly weaker, compared with the forecast made in ... March," but he added that they would know more in a few months’ time about how consumption and investment would be affected. (See MNI INTERVIEW: Swedish Household Demand Frail - FI Econ Head )

His colleagues made clear that cuts were back on the menu, with Deputy Governor Aino Bunge citing "a heightened probability that the policy rate will need to be cut more. 

Under Thedeen's leadership the Riksbank board has operated in a consensual way, with markedly less fragmentation than in the past. That helps explain why some analysts still see a significant chance of no change in June while forecasting a unanimous vote for a cut - as the committee as a whole could choose to rally behind the decision.