The minutes of the Riksbank's November meeting
2024-35
On November 7, the Riksbank decided to cut interest rates by 0.5% to 2.75%. Yesterday, a week later, the minutes from the Executive Board meeting were published. They make for interesting reading.
They show that the staff had, after careful consideration, decided to advise the Executive Board to cut interest rates by 0.5% rather than by 0.25%. While private sector analysts were generally behind that decision, market pricing attached some probability to smaller cut.
Inflation pressures were seen as compatible with the Riksbank’s 2% target for CPI-F (CPI inflation at a fixed interest rate). While risk to the outlook for inflation were seen as balanced, uncertainty about global and Swedish economic developments were seen as higher than on average. The outcome of the US presidential election the previous day was not yet clear, but it appeared that former President Trump was likely to win. That added uncertainty: his economic programme seen as unclear, and it was not easy to assess how economic policy in other economies might change in response to his election.
The Swedish krona had depreciated, particularly against the US dollar. This seemed to reflect external developments – in particular, the US election and likely policy shifts by a new Trump administration – rather than news about the Swedish economy.
Sweden was seen as in a mild recession. While the data were mixed, there were no clear signs that economic recovery was about to take hold. GDP had contracted in the third quarter, domestic demand was weak and the manufacturing sector was slowing. Unemployment had continued to increase gradually.
While the US economy had surprised on the upside, the euro area, which is more important for Sweden, was weaker. The deep structural problems facing German industries were a cause of concern.
With inflation around target and economic activity becoming a worry, the risk outlook had changed. Stronger economic activity was seen as required to ensure that inflation remained around target. The Executive Board felt unanimously that a larger than usual cut of 0.5% was warranted under the circumstances.
Two questions seemed to be on Board members’ minds. One was whether the depreciation of the krona was temporary or not. If it was temporary, it would not necessarily affect economic conditions and the outlook for inflation, and therefor for policy. Time will tell.
The second was whether cutting interest rates at a somewhat faster rate than previously anticipated would have any implications for the terminal rate. One view was that the cuts would simply speed up the attainment of the terminal rate. Another view was that cutting at a more rapid pace could lead to a lower terminal rate. Again, time will tell.