Sweden's Tepid Inflation Surprise: A Catalyst for Rate Cuts?

Sweden’s April core inflation data, released on May 19, 2025, delivered a mixed signal to markets: the CPIF excluding energy rose to 3.1% year-on-year, narrowly missing expectations of 3.2%. While this marked the highest rate in 14 months, the slight undershoot has reignited calls for the Riksbank to cut interest rates sooner than anticipated. For investors, this data point could reshape Sweden’s monetary policy trajectory and offer clues about the krona’s path, equity valuations, and bond yields.

The Inflation Surprise and Its Implications

The 3.1% reading, while still above the Riksbank’s 2% target, reflects a moderation in underlying price pressures. Analysts at Swedbank and SEB attribute this to temporary factors, including revisions in the consumer basket calculation and lagged commodity price declines. These “one-off” influences, they argue, will fade by early 2026, allowing core inflation to drift closer to the central bank’s goal.

Crucially, the data undermines the Riksbank’s earlier stance that rate cuts could wait until 2027. The bank now faces pressure to act sooner, as the inflation print aligns with broader global trends: slowing global demand, U.S. trade policy uncertainty, and a stronger krona are all weighing on price growth.

Market Reactions: The Krona Weakens, Rate Cuts Priced In

Investors immediately downgraded their outlook for rate hikes. The Swedish krona fell 0.2% against the euro to 10.9061, signaling reduced confidence in future policy tightening. Swap markets now price in a 58% probability of a 25-basis-point cut by June, with cumulative easing expectations rising to 30 basis points by August—up from 19 basis points before the data release.

Equity markets, particularly export-reliant sectors, may benefit from a weaker krona. The OMX Stockholm 30 index, which includes companies like H&M and Ericsson, could see gains as a cheaper currency boosts international competitiveness. However, domestic consumer stocks—sensitive to inflation—might face headwinds if wage growth remains subdued.

The Riksbank’s Dilemma: Inflation vs. Growth

The central bank’s challenge is twofold. On one hand, the 3.1% core rate underscores lingering inflation inertia. On the other, economic growth remains tepid: GDP forecasts for 2025 have been trimmed to 0.8%, with export sectors hampered by global trade tensions.

Riksbank Governor Erik Thedeen faces a credibility test. If the bank delays cuts, it risks appearing out of touch with market expectations. Yet premature easing could fuel asset bubbles in Sweden’s already overheated housing market. The May policy meeting will provide the first clue—analysts at SEB predict a June cut is now all but certain.

The Broader Economic Outlook

Sweden’s economy is diverging from its European peers. While the eurozone battles recession risks, Sweden’s fiscal stimulus and rising household incomes (driven by labor shortages) are supporting domestic demand. However, exports—30% of GDP—are vulnerable to U.S. trade policies and a stronger krona.

SEB’s Nordic Outlook report projects core inflation to fall below 2% by 2026, aligning with the Riksbank’s target. This hinges on two assumptions: commodity prices remain subdued, and global demand does not rebound sharply. If either fails, inflation could rebound, complicating the easing path.

Conclusion: Positioning for Easing

The April inflation data reinforces the case for the Riksbank to cut rates this year. With markets pricing in a June move and cumulative easing of 30 basis points by August, investors should consider:

1. Swedish bonds: Short-term yields could drop further as the policy rate declines.
2. Equities: Cyclical sectors like industrials and tech may outperform as the krona weakens.
3. Currency plays: The SEK/EUR pair could test 10.80 if the Riksbank acts aggressively.

Crucially, the 3.1% reading—though above target—is no longer a barrier to easing. With temporary factors fading and growth risks mounting, the Riksbank is likely to pivot. Investors who position ahead of this shift could capture gains in both bonds and equities.

The next key data point is May’s CPIF release, due June 18. A further slowdown below 3% would all but guarantee a June rate cut—a move that could redefine Sweden’s economic landscape for years to come.