It was only yesterday that we were looking at the interest-rate cut and other monetary easing in China. Today we see that a bit like London buses two have arrived at once.
The Executive Board has decided to cut the policy rate by 0.25 percentage points to 3.25 per cent. If the outlook for inflation and economic activity remains unchanged, the policy rate may also be cut at the two remaining meetings this year.
In terms of the interest-rate that could have been the ECB but the use of Executive Board rather than Governing Council reveals it is the Riksbank of Sweden. At first one might think they are simply backing up what we looked at just over a month ago on August 20th.
The issue is that the guidance provided as recently as June apparently already requires an update as 1-2 cuts becomes 2-3 with interest-rates now expected to end the year at 2.75% or 3%.
As you can see they upped the ante in terms of expected interest-rate cuts and little more than a month later we see they are at it again.
The forecast for the policy rate reflects that a cut of 0.5 percentage points at one of the coming meetings is
possible.
Should that happen then Sweden would end the year with an interest-rate of 2.5% as they look to rather chop interest-rates. Then we see that they are singing along with Andrea True Connection.
More, more, moreHow do you like it? How do you like it?More, more, moreHow do you like it? How do you like it?
Because now they are planning to cut next year as well.
It also indicates that one or two further cuts may be made
during the first half of 2025.
If you look at the charts provided they are suggesting an interest-rate of 2.25% for then. But there is always a problem with Riksbank forward guidance and it is called the Rikshog courtesy of Martin Enlund/
If you look at the chart you will see that in fact the last place interest-rates go to is the one forecasted by the central bank. To the reply that is from 2019 and things may have changed here they are from January.
They were suggesting that at some point in 2026 they might trim interest-rates to 3.5% whereas they are now saying 2.25%. As you can see from the yellow line above that they were not believed. These days most read Riksbank forecasts whilst listening to Kelis.
Might trick me onceI won’t let you trick me twiceMight trick me onceI won’t let you trick me twice, no
Everybody’s Doing It
The explanation has a somewhat different twist as we see confirmation of my theme that central bankers are pack animals.
According to the pricing of futures contracts for short-term money market rates, market participants expect the Federal Reserve to cut the policy rate by around
1.7 percentage points until the middle of next year. For the ECB, expectations of rate cuts are somewhat lower. The ECB is expected to cut the deposit rate by around 1.3 percentage points over the same time period.
They are clearly trying to present themselves as being in an international pack. Along the way we have the oddity that the ECB is expected to cut interest-rates by less than the US Federal Reserve. Even if you allow for the fact that the US interest-rate is presently some 1.5 points higher than in the Euro area that looks odd when you note this.
In the United States, GDP rose more than expected in the second quarter, by 0.7 per cent compared with the first quarter of this year………During the second quarter, GDP rose by 0.2 per cent compared with the first quarter.
We can add in this week’s PMI release which hints at a slowing in the Euro area from what was not much in the first place. So there may be more scope for the Riksbank as I note this being reported in response.
HSBC now see ECB cutting at every meeting, starting from October ( @MrMBrown)
So there may well be scope for the Riksbank to cut interest-rates even further than it has so far hinted at should this turn out to be so.
The Swedish Economy
If we switch to domestic matters we see this.
The recovery of the Swedish economy looks like being somewhat delayed.
Which has them mulling this.
GDP fell somewhat during the second quarter, compared with the first. Broadly speaking, the Swedish economy has not grown at all since the end of 2021 and has been in a mild recession for some time.
If we switch to Sweden Statistics we are told this.
GDP decreased by 0.3 percent in the second quarter of 2024, seasonally adjusted and compared with the previous quarter.
There was also a rather downbeat kicker.
Net exports contributed positively to GDP-growth by 0.9 percentage points.
So domestic demand fell by 1.2%. You can put the blame on inventories to some extent.
Changes in inventories contributed negatively to GDP by 0.6 percentage points.
But even so the domestic picture was weaker than the overall GDP number.
Looking ahead they are officially optimistic.
Economic activity is expected to improve next year. Domestic demand is the driving force behind the expected recovery in the Swedish economy. Household consumption
is expected to grow more quickly towards the end of the year and next year, as real wages rise, interest rates fall and fiscal policy becomes more expansionary.
But that comes with a problem with a weak present situation.
Outcomes during the summer months, together with indicators such as redundancy notices and job openings, suggest the labour market will develop weakly for some time yet.
Although real wages are on the up.
Wage increases have slowed down over the year but real wages are rising as inflation falls. In June, wages rose by 4.0 per cent, which is approximately 0.5 percentage points lower than at the beginning of the year.
Inflation
Whilst in theory this should be the driving force I think that the worries highlight above are especially as we note this.
In August, CPIF inflation fell to 1.2 per cent. Low energy prices pushed inflation down and, when measured in terms of the CPIF excluding energy, inflation was 2.2 per cent in August. The rate of increase of the CPIF excluding energy,
measured as a three or six-month change calculated as an annual rate, has been close to two per cent since the start of the year.
Comment
We see a situation that has some similarities with the Euro area. The cost of living crisis has in fact had an even larger impact and GDP fell in the latest quarter. So the Riksbank looks to also have raised interest-rates too late to have a full effect in inflation. But has had the impact of sending the economy into reverse.
We can also look at another issue as the money supply plunged last year with annual growth of the M1 measure falling to -13.9% in August last year. At this point we can see how domestic demand is so weak and looking ahead the latest reading for July was -5.1%. So they could take kind of a leaf out of the Chinese playbook.
As a result of bond maturities and the Riksbank’s sales of government bonds, the
Riksbank’s securities holdings in Swedish kronor have almost halved since the
beginning of 2022. During the second quarter of this year the holdings amounted to
around SEK 565 billion
They have been actively reducing the money supply via QT balance sheet moves. Thus rather than making panic interest-rate cuts they would stop the QT. Although of course that leaves them with ever increasing losses.
Sweden’s government is to inject Skr25 billion ($2.46 billion) of capital into the country’s central bank on September 25…….The bank suffered losses because of its holdings of krona-denominated debt, which it held to maintain price stability and which peaked at Skr927 billion in May 2022. (centralbanking.com)
