This morning has brought something which I thought was pretty much inevitable in these times so let us get straight to it. From the Riksbank of Sweden.
To provide further support to economic activity and to stabilise inflation at the target in the medium term, the Executive Board has decided to cut the policy rate by 0.25 percentage points, to 1.75 per cent.
There is quite a bit to unpick in that sentence. So economic activity needs “further support” which apparently will also “stabilise inflation”. However we have seen our first sprinkle of magic dust so we have the inflation bit defined as the “medium term” meaning we have the Humpty-Dumpty critique in play.
“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’
’The question is,’ said Alice, ‘whether you can make words mean so many different things.’
’The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all.” ( Lewis Carroll)
So should inflation rise in response to the sequence of interest-rate cuts, the response will be that the medium term has not arrived yet or to present a new medium term that is safely in the distance. So it would be kicked like that poor battered can safely into an unspecified future date.
Inflation
If we continue on the inflation theme we see quickly why they needed some magic dust.
In Sweden, inflation remained elevated in August.
Sweden Statistics tells us this.
The inflation rate according to the CPIF (Consumer Price Index with fixed interest rate) was 3.2 percent in August, up from 3.0 percent in July.
Whilst there is nothing that can be done now about past inflation it is also awkward cutting interest-rates with inflation not only above target but in fact having just risen in annual terms. Looking at the detail the leader of the inflationary pack is below.
Electricity prices rose from July to August and were 25 percent higher than the corresponding period a year ago.
No doubt a big issue for consumers but apparently not for the Riksbank.
But inflation excluding energy prices declined somewhat and approached the earlier forecast.
Amazing really when you consider those cold Swedish winters. But central bankers inhabit another universe. Indeed a really unworldly one if they think they can get away with this again. The emphasis is mine.
New information has given further reassurance regarding the assessment that the high inflation is transitory; for instance, companies’ pricing plans have declined and the krona has strengthened.
Let me take you back to November 2021 when it was pursuing a similar line.
At its monetary policy meeting on 24 November, the Executive Board of the Riksbank therefore decided to hold the repo rate unchanged at zero per cent, and to purchase bonds during the first quarter of 2022.
As you can see there was apparently so little danger of inflation it was buying bonds and had a 0% interest-rate. So it was trying to boost inflation and it was successful at this. Only a year later.
Inflation is still far too high. In October CPIF inflation was 9.3 per cent.
In fact the inflation they were boosting was suddenly a bad idea.
A high rate of inflation over a long time can create serious problems.
Perhaps they thought they would get angry Swedes knocking at their door using words like incompetence. But if we return to the present we see the same old playbook. If you ignore the things that have gone up in price then things are pretty good.
But inflation excluding energy prices declined somewhat and approached the earlier forecast.
The next bit of PR is really odd.
But the Riksbank is following developments closely.
I guess they are hoping you will not realise that they are supposed to be looking ahead.
Economic Growth
Apparently this is going really rather well.
The conditions for stronger economic activity going forward remain, and there are some signs that they have improved recently.
But then in quite a swerve the next sentences take a rather different view.
However, growth has been weak for a long time, and the timing of the expected recovery has been gradually pushed forward. The turnaround on the labour market also appears to be taking longer than expected.
So the interest-rate cuts before today are working except that they are not! So in summary so far they are taking a risk with inflation to support economic growth which both is and is not going well.
What happens next?
If the outlook for inflation and economic activity holds, the policy rate is expected to remain at this level for some time to come.
As central bankers set the future based on their interest-rate this is in fact meaningless and let me introduce you to something that shows that Riksbank forecasts are hopeless from long before the mess they made of the cost of living crisis.
This became known as the Rikshog and as you can see it shows that the Swedish central bank is not only consistently wrong it is one of the best reverse-indicators you will ever see. In short whatever it thinks interest-rates will be they wont. In fact if you click on the Tweet below I was correctly suggesting a Rikshog in the opposite direction was on its way.
https://x.com/notayesmansecon/status/1752680884572946929
This is in fact the best critique of the policy of Forward Guidance that exists. There is an irony in a way that it comes from the world’s oldest central bank. But whilst there was a lot of competition for the title of worst performer ( The Reserve Bank of Australia had to apologise to Parliament) I think that the Riksbank has unequaled consistency. In other areas it would be admirable. Like in those episodes of Star Trek where everything is reversed.
As an aside these people never get called out for these and when do we ever see a sacking for what is incompetence. Mistakes will be made but my real point is the sequence of them.
QT
In simple terms the detail above means that the Riksbank bought Swedish bonds at the top and has been selling them at the bottom. They put it like this.
As part of the Riksbank’s efforts to normalise its balance sheet, holdings of securities have been reduced rapidly in recent years through maturities and active sales.
This year that will stop.
The Riksbank will conclude its ongoing sale of Swedish nominal government bonds when the securities portfolio reaches a value of SEK 20 billion. This is expected to happen in December 2025.
By stop they mean maybe not.
After this, the Riksbank will start trading in the securities portfolio. Further information will be provided towards the end of 2025.
On their track record we may be seeing more of this. From the 2024 accounts.
In September, the Riksbank received a capital injection of SEK 25 billion after submitting a petition for capital restoration to the Riksdag.
They took a large interest-rate risk and Swedish taxpayers are paying the price.
Comment
The present situation is complex in the sense that the latest GDP release had quite a nuance.On the surface it looked strong for these times.
GDP increased by 0.5 percent in the second quarter 2025, seasonally adjusted and compared with the previous quarter.
But the initial detail provided by Sweden Statistics is misleading because look what you find further down the page.
- Changes in inventories contributed positively to GDP-growth by 1.1 percentage points mainly due to changes in trade inventories.
Inventories explained around double the growth rate leading to exactly the opposite view to that provided by the Riksbank. The inventory situation is not dissimilar to France. There are likely Trump tariff effects here but remember central bankers were also pointing out they would be inflationary which seems to have gone in their recycling bins.
So the Riksbank has yet again abandoned inflation targeting and I would not be surprised if they cut again.
