The Swedish inflation continues to be significantly dampened, and the Central Bank is, at least partially, wrong with its forecasts. The broad inflation rate, CPI, dropped to 1.9 percent in August. CPIF, which excludes the effect of interest rate changes and is the Central Bank’s inflation target, simultaneously dropped to a low 1.2 percent. A level we have not seen since 2020 and well below the Central Bank’s forecast of 1.7 percent.
The bank’s forecasting prowess is, however, saved by hitting the mark on CPIF excluding energy, which landed at 2.2 percent in August.
There is no doubt that the Central Bank will lower its policy rate in conjunction with the monetary policy announcement on September 25th. The question is whether the bank will settle for a 25 basis point cut or opt for a double cut?
A more cautious cut is primarily supported by the fact that CPIF excluding energy still remains above 2 percent. The Central Bank’s board has increasingly leaned on this measure throughout the year when pointing out the broader inflation risks. However, the decline in inflation is expanding, and most signs point to CPIF excluding energy also falling below 2 percent in the coming months.
When it comes to CPIF, which is essentially the Central Bank’s main measure, it is more obvious that the bank should make a significant move already on September 25th. Especially since inflation expectations for both one- and two-year horizons have now fallen below 2 percent.
But since both the ECB and the Federal Reserve are expected to settle for a 25 basis point cut, we at Placera lean towards the Central Bank adopting a more cautious approach as well. This afternoon, the ECB will deliver its interest rate decision, and next week it will be the Federal Reserve’s turn. If there are softer tones than expected from these two, it could very well tip the scales towards a double cut from the Central Bank’s side.
If the Central Bank settles for a 25 basis point cut in September, it is likely that a larger cut will be on the table in either November or December during the monetary policy announcements. Especially since most indications suggest that both CPIF and CPIF excluding energy are likely to further decrease in the coming months. Inflation expectations are therefore at risk of decreasing even further and becoming entrenched at low levels. And this is something that the Central Bank really wants to avoid.