MNI RIKSBANK WATCH: Cut Likely,Though Guidance May Be Cautious

Sweden’s central bank is widely seen making its first reduction to interest rates of the cycle at this week's meeting, after its March rate projection suggested a cut in either May or June, and Governor Erik Thedeen indicated the cut would likely come earlier if economic data kept in line with March’s forecasts.

Most analysts expect the Riksbank to say that it is cutting its policy rate by 25 basis points to 3.75% on Wednesday, putting it ahead of the pack of advanced economy central banks as they shift into easing mode.

This month will not see fresh Riksbank forecasts, and any decision to hold the policy rate would leave a June cut looking near inevitable. While krona weakness will be a consideration for the central bank, there is little reason to suppose that delaying a reduction by one month would make much difference to currency markets, though Thedeen might provide some support by accompanying a May cut with a more cautious tone towards future easing.

March inflation surprised to the downside, with the target CPIF measure, which calculates CPI with a fixed interest rate, falling to 2.2%, within touching distance of the 2.0% target, and well below the 2.7% expected by the Riksbank. The core measure, CPIF ex-energy, came in at 2.9%, versus the Riksbank's 3.3% forecast.

The krona, however, has been a wildcard for policy setting. On its KIX real effective exchange rate index, the krona has depreciated 1.7% since the March meeting and some 5.5% so far this year. Speaking to MNI after the March decision, Thedeen acknowledged the importance of the krona to policy setting but also the uncertainty over how it would react to a May cut, with currency moves in part depending on perceptions of what the ECB and the Fed are going to do. (See MNI INTERVIEW: Krona A Factor In Riksbank Cut Timing - Thedeen)

While since the March meeting, expectations of the next ECB move have become more defined, with officials pointing to a June cut, Fed policy has become increasingly uncertain as expectations of early easing fade away, with the latest steer suggesting that the high-for-long Table Mountain approach has come back into fashion.