Riksbank expected to maintain 2% policy rate at upcoming meeting

Investing.com -- The Riksbank is likely to keep its policy rate at 2% when it meets next week, according to Capital Economics, as recent economic data isn’t weak enough to warrant another rate cut.

At its June 18 meeting, Sweden’s central bank reduced its policy rate by 25 basis points to 2% and indicated "some probability of another cut this year," represented by approximately 12 basis points of cuts in Q4 in its official forecast.

These decisions were influenced by weaker-than-expected first-quarter economic performance and high economic uncertainty.

Recent data shows continued economic weakness, with preliminary Q2 GDP estimates indicating minimal growth of 0.1% quarter-over-quarter and household consumption rising just 0.2%. Surveys have also suggested weak growth at best.

However, some positive developments have emerged. Industrial production increased significantly in the second quarter, led by the transport equipment sector, despite U.S. tariffs and uncertainty about future tariff levels.

Consumer confidence also rose substantially in July, suggesting potential consumption growth. Additionally, the EU-US trade deal has reduced downside economic risks.

Inflation has been stronger than the Riksbank anticipated since the June meeting. CPIF inflation, the central bank’s target measure, increased from 2.3% in May to 3.0% in July, while the measure excluding energy rose to 3.1%.

Both exceeded the Riksbank’s forecasts of 2.5% and 2.8% respectively. The CPIF inflation increase was partly driven by higher energy prices, but also by significant increases in travel-related services and core goods inflation.

Capital Economics believes the data hasn’t been poor enough to justify a rate cut next week.

With the policy rate at a neutral level and the effects of 150 basis points of cuts over the past 12 months still working through the economy, Riksbank policymakers will likely wait for clearer signals before considering further easing.

Looking forward, Capital Economics expects the Swedish economy to begin recovering in coming quarters as real disposable incomes continue to increase at a solid pace over the next couple of years.

This, combined with relatively high price expectations reported by businesses, will likely encourage the Riksbank to maintain its 2% policy rate for the foreseeable future.

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