By Simon Johnson
STOCKHOLM (Reuters) -Sweden’s central bank kept its policy rate unchanged at 2.25% as expected on Thursday, predicting rates would remain steady in the near term, but said it was ready to act should global economic developments threaten to increase inflationary risks.
The Riksbank has cut its key rate six times since spring last year, the last time in January when it said that it had probably done enough to boost a sluggish economy.
Inflation outcomes since then have come in above expectations and the Riksbank said it now expected consumer price increases to remain above the 2% target level through this year, before falling back.
“We cannot exclude that what is happening in the world will have a significant effect on economic developments and consequently, on inflation,” Governor Erik Thedeen told reporters.
If inflation diverges from forecasts, “we will act,” Thedeen said. “We have an action bias, if anything, rather than an inaction bias.”
Interest rate futures point to a chance of higher rates ahead, though the Riksbank will be cautious given conditions that Sweden’s Finance Minister Elisabeth Svantesson on Wednesday called “brutally uncertain”.
“We think CPIF (headline inflation), excluding energy inflation, is likely to remain above 2% for the next couple of years and suspect that the Bank’s next move will be a hike, albeit not until next year,” Adrian Prettejohn, Europe economist at Capital Economics said.
The Riksbank said it viewed the recent uptick in inflation as temporary, with expectations of lower price increases on food, and a stronger krona. It expects the pace of price rises to stabilise close to target next year.
RISKS
Analysts had unanimously predicted no change in rates but were divided over the policy direction ahead, reflecting uncertainty about U.S. trade policy, the war in Ukraine, and how to interpret Germany’s expansionary fiscal plans for inflation and growth.
That difference of opinion remained after the Riksbank’s announcement.
“We believe that the probability of a cut is higher than that of a hike in 2025,” Swedbank said. “A weaker economy, or a stronger krona, are risks that could force the Riksbank to cut the policy rate later this year.”
The U.S. Federal Reserve kept its rate on hold on Wednesday, as did the Bank of Japan. On Thursday, the Swiss National Bank cut its key rate, saying inflationary pressures were well contained.
(Reporting by Simon Johnson, Niklas Pollard, Anna Ringstrom and Johan Ahlander in Stockholm, Terje Solsvik in Oslo; editing by Niklas Pollard and Rachna Uppal)
