Riksbank Expected to Cut Interest Rates to 2% Amid Economic Recovery: ING

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Riksbank Expected to Cut Interest Rates to 2% Amid Economic Recovery: ING

The Swedish Central Bank, Riksbank, is expected to lower its policy rate to 2.5%, aligning with market consensus. This move follows a significant 50 basis point cut in November. Along with the Bank of Canada, Riksbank has aggressively pursued interest rate reductions and is witnessing positive outcomes from its monetary policy adjustments.

The Swedish economy is experiencing a revival, particularly in the housing market, where variable-rate mortgages are prevalent. The decline in interest rates has led to improved sentiment, an increase in transaction volumes, and a rise in housing prices. Currently, property prices are rising by approximately 8% on an annual basis. Additionally, consumer confidence has returned to pre-pandemic levels.

Employment conditions in Sweden are also showing signs of stability; the unemployment rate has ceased to rise, and while layoff levels remain slightly above pre-COVID averages, they have stabilized. Despite these improvements, Riksbank may not yet be ready to halt interest rate cuts, as the end of the easing cycle may be approaching.

Sweden's economic growth, as reflected in the latest GDP figures, remains modest. Despite the improvement in consumer confidence, household consumption remains weak. Inflation data has exceeded Riksbank's projections from September; however, no significant increase is expected until 2025.

The upcoming spring wage negotiations are expected to yield results consistent with Riksbank's 2% inflation target, considering the moderate inflation expectations of both employers and employees.

Given the risks associated with global trade tensions—particularly those stemming from Donald Trump's trade policies—and the threats posed by Sweden's export-dependent economy, further interest rate cuts are anticipated.

Analysts from ING forecast two additional cuts next year, alongside this week's anticipated reduction, which could potentially lower the policy rate to 2%. The updated interest rate projections expected to be announced by Riksbank at the end of this week are also likely to reflect this trajectory.