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Will there be a rate cut this spring or not? It is brewed in bank offices, storefronts and at home at kitchen tables. Speculation gained momentum when the minutes of the Riksbank’s last meeting were published a few weeks ago, followed by a recent inflation report for January that showed price pressures continuing to ease. Several banks have begun lowering their fixed mortgage rates, but have not yet touched variable rates.
When Statistics Norway published the detailed January figures on Friday, nothing really changed. Electricity prices, rents and food rose while interest costs fell.
Electricity prices, like food prices, occupy a disproportionately large place in the psychological inflation basket. These are fast-moving prices that we encounter more often in everyday life than, for example, air travel or cell phones. Especially when it comes to electricity prices, Swedes – not least the more than half of the population living in villas – also seem to be suffering from a kind of post-traumatic stress disorder caused by the 2022 electricity crisis.
Facts.Inflation in January
The consumer price index CPI rose from 0.3 to 0.5 percent.
The fixed rate consumer price index, or CPIF, fell from 2.1 to 2 percent.
The energy-adjusted CPIF, a measure of underlying inflation, fell to 1.7 percent from 2.3 percent, below the Riksbank’s forecast.
The biggest contributor to inflation was higher electricity prices, followed by higher food prices and higher rents.
But in both cases It’s also about prices, over which the Riksbank has very little influence. Erik Thedéen and his colleagues can control global food markets just as they can do something about winter’s persistence. Therefore, the central bank also tends to ignore such moves as long as there are no signs that they are starting to harm growth or underlying inflation pressures.
There are no such signs so far, although electricity prices are also expected to leave their mark on February inflation. On the contrary, price pressure is increasing slowly.
Perhaps a little too calm, if Riksbank member Per Jansson, the interest rate dove, is to be believed, who warned that the strong Swedish krona could reduce inflation even more than the Riksbank currently expects.
The krona is now at its highest level in around four years against both the US dollar and the euro. Nice for those planning a holiday abroad this summer, but less nice for the competitiveness of Swedish companies and the inflation target.
The inflation target is the main argument for those who want to see interest rates cut as early as spring. If inflation deviates from target for too much or for too long, it could damage long-term confidence, and in the meantime there can be little harm in having a little support for a fragile economy that is still on the road to recovery.
For those who think that the Riksbank should wait, it is precisely this improvement that has an impact. The economy is already on the rise, real wages are rising and fiscal policy will provide more support ahead of the fall elections. Due to companies’ hiring plans, the job market even smells a little like spring. Trying to adjust to the krone, whose exchange rate is currently driven far more by events in the outside world than by developments at home, is about as pointless as trying to control global energy markets.
The rest of the board seems to fall somewhere between the two camps. A rate cut could be on the horizon, but would likely require a combination of low inflation numbers and setbacks in the economic recovery.
In the end, interest rate decisions boil down to a few simple questions with difficult answers: Does the economy need more gas or more brakes, and is the key interest rate now at a level that is a good fit? It may seem that Sweden deserves another rate cut after the economy has stagnated for a few years, but is it really necessary?
There is a clue The estimates are about the so-called neutral interest rate, the level at which the Riksbank neither stimulates nor cools the economy. It cannot be said with certainty exactly where it is, but the Riksbank estimates that it is a key interest rate of between 1.5 and 3 percent. From this perspective, today’s 1.75 percent doesn’t look very harsh.
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