MNI RIKSBANK WATCH: Hold Seen In Aug, Data Interpretation Key

The Riksbank is mainly expected to leave its policy rate on hold at 2.0% in August but analysts are divided over whether recent upside inflation and downside growth surprises will allow the Swedish central bank to signal a continuation of its easing cycle with a further cut next month.

August is an interim meeting for the Riksbank's Executive Board, with no new forecast round, but its interpretation of the conflicting data should come in its economic update and press conference.

Its June Monetary Policy Report showed an average policy rate of 1.99% in Q3 and 1.92% in Q4, consistent with around a 50% chance of one more cut in H2, and with the terminal point, three years out, at 2.01%. Unsurprisingly, analysts have diverged over what will happen next, but Governor Erik Thedeen and colleagues will have the option following the policy announcement of giving a clear steer towards or away from a September cut or still leaving it open.

Deputy Governor Anna Breman is also due to speak on Aug 21, the day after next Wednesday's announcement.

MIXED SIGNALS

On the target price measure, CPI with a fixed interest rate (CPIF), inflation rose 0.2 percentage point to 3.0% on the year in July while ex-energy it was 3.2%, both readings markedly above the Riksbank's expectations. A key question is whether the bank sees these overshoots as likely ephemeral and if policymakers instead place greater weight on the weaker than anticipated economic activity.

In the June Monetary Policy Report the Riksbank said that both CPIF and CPI ex-energy would fall back to around 2.5% for the rest of 2025 as previous increases had been largely due to temporary factors, such as prices of some food items.

While inflation has surprised to the upside economic activity appears to have been even softer than the Riksbank assumed, with the flash estimate of Q2 GDP up just 0.1% on the quarter. While upward revisions in subsequent estimates of Q2 GDP are plausible, based on past experience, the central bank's estimate for growth in 2025, while weak, may still turn out to be too rosy. The June MPR saw this year’s growth at 1.2%, weighed down by uncertainty, before rising to 2- 2.5% in the following years.

The krona, having appreciated markedly on the Riksbank's KIX index in the first part of the year, has declined by around 2% since the start of June, with a higher index reading indicating a depreciation. Currency weakness would put a soft growth and stickier inflation scenario back into play although the currency has rallied somewhat since the start of August.

 In June Thedeen said a plausible scenario was one where growth was weak and the krona remained strong, as funds flowed out of U.S. dollars into the domestic currency. (See MNI INTERVIEW: Risk Of Strong Krona, Weak GDP - Riksbank Head )