The Riksbank announced its latest monetary policy decision at 8:30 BST, hiking the repo rate by 50bps to 3.5%, in line with market and analyst consensus.
As expected, it wasn’t the policy decision that moved markets, but instead the corresponding guidance provided by the central bank which was almost uniformly dovish. While the central bank’s repo rate projections indicated a 25bps hike was likely at either its June or September meeting, confirming the markets priors of a terminal rate of 3.75%, the projection path now included policy easing as early as Q3 2025. With the repo rate projection viewed as mainly a signalling exercise by markets, the incorporation of rate cuts doesn’t necessarily invite confidence in the central bank’s ability to hold rates at such elevated levels, even though both markets and analysts expect policy easing to commence earlier than the Riksbank suggests. This undermines the bank’s ability to generate a stronger SEK, which they continued to state their preference for in the policy statement. Further providing a dovish impulse for markets was the fact that two members of the Executive Board, First Deputy Anna Breman and Deputy Martin Floden, voted in favour of a 25bp hike, citing reduced wage pressures and well-anchored inflation expectations.
Finally, unlike in February, the central bank steered clear of adjusting its balance sheet, which back at their last meeting provided the basis for SEK inflows as it increased liquidity within Sweden’s bond market.
Following today’s announcement, EURSEK rallied 0.6% to trade just half a percent below the level that induced a much more hawkish Riksbank back in February. With the central bank still showing an explicit preference for a stronger SEK, today’s response by markets will undoubtedly raise the spectre of FX intervention. However, with limited reserves and depreciationary pressure from a more hawkish ECB yet to moderate, we continue to think that this is an unlikely outcome in the near-term.
EURSEK rallies towards its multi-decade high as Riksbank hike viewed as dovish by markets
Riskbank hikes 50bps due to higher core inflation, but this wasn’t unanimous amongst the Executive Board
One of the most notable aspects of today’s decision was the level of dissent present amongst the Executive Board. With the resignation of Deputy Henry Ohlsson at the end of March, who also indicated that he would not participate in either the April or June policy meetings, and Breman and Floden both advocating for a 25bp hike, this means that the latest rate hike was passed with just a 3-2 majority. With headline CPI printing at 10.6% YoY in March, down from 12% in February, and the Riksbank’s favoured CPIF measure coming in at 8.0%, down from 9.4% over the same period, this provides something for the Board’s doves to hang their hat on. Reinforcing this confidence, and a factor cited by the doves, were the result of recent wage negotiations. Covering the next two years of pay rises, the negotiated increase in wages by manufacturing unions was modest, helping anchor expectations and significantly reducing the risk of a wage price spiral. In addition, February GDP figures showed a contraction of 1.0% MoM and the composite PMI measure printed in contractionary territory, suggesting that monetary policy is beginning to weigh on activity.
With the Riksbank anticipating a further slowdown in the Swedish economy this year, with GDP ultimately falling by 0.7%, this weak growth is also expected to ensure that unemployment rises over the same period.
However, this economic deceleration is not being seen yet and employment data, which actually improved in the most recent round of releases, despite the monetary tightening, with the PES measure of unemployment falling from 3.0% to 2.9% in March. Even more concerning for more hawkish Executive Board members is the persistence of core inflation. The CPIF measure excluding energy showed inflation fell by a much less dramatic 0.4% MoM in March, despite the fast pace of disinflation in the headline measure. This took the annual figure from 9.3% to 8.9%, above the Riksbank’s February projection of 7.5%, suggesting that whilst policy may be expected to cool economic activity, it is not yet impacting core inflationary pressures, which remain more robust than indicated by some headline figures.
A final hike in June is likely, but the sustainability of rates at that level is seriously in question
The Riksbank’s latest policy projections stated a 50% probability that a final 25bp hike would be enacted at either the June or September meeting. This is the normal signal that the Riksbank provides markets when it wants to indicate further tightening, but not necessarily lock itself into the move in advance. After all, back in February they signalled 21bps worth of hikes for today’s meeting and a 50% probability of another 25bp hike in Q3. This is far short of the 50bp hike that ensued. In our view, with core inflation conditions likely to turn by September’s meeting and with dovish dissent already visible within the Executive Board, the decision to hike one final time or lock in the terminal rate at 3.5% will be determined at the June meeting.
As things stand, with core inflation proving more resilient than the central bank expects and with our expectation of the ECB hiking rates to a terminal level of 3.75%, we anticipate the Riksbank will hike one more time in June.
The conversation will then naturally move to the sustainability of holding rates at this level. For FX markets, this will be key to determining how EURSEK will trade in the second half of the year. Despite the Riksbank expressing a clear desire for a stronger krona, compounding similar rhetoric from February’s meeting, the fact that they are now forecasting a modicum of policy easing in late 2025 has been counterproductive to their aim. To the naked eye, factoring just 30bps of rate cuts from Q3 2025 and Q2 2026 is a fairly piecemeal development, especially considering this is far less dovish than the current path priced into markets. But for markets, the historically inaccurate repo rate projection is seen as more of a signalling exercise by the central bank as opposed to a modelling exercise designed to accurately predict policy rates. The fact that they have now chosen to reference rate cuts, even if they are only visible at the end of the forecast horizon, has therefore been viewed in a dovish manner. The one-year forward cash rate has subsequently fallen 30bps to 3.5% alongside a dovish repricing in front-end Swedish bond yields.
Riksbank’s April projections indicate a final hike is likely at either June or September meeting, while rate cuts factored into late 2025 is a dovish development
Simon Harvey, Head of FX Analysis
Nick Rees, FX Market Analyst