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Central Bank Economists: Repo Rate on its Way to 2 Percent

The recovery is near after nearly three years of stagnation and 2025 will see growth take off, according to an economic forecast from Swedbank. The Swedish Central Bank is contributing by lowering the interest rate to 2.75 percent by the end of the year and down to 2.00 percent next year, according to the forecast. The economists at major bank SEB make the same assessment.

» Updated: 27 August 2024, 11:34

» Published: 27 August 2024

Central Bank Economists: Repo Rate on its Way to 2 Percent
Photo: Magnus Lejhall/TT

The main scenario is rate cuts of 25 points (0.25 percentage points) at a time by the Swedish Central Bank, but larger cuts are also possible.

"We cannot rule out that the Swedish Central Bank will need to act faster and lower than our forecasts," says Swedbank's chief economist Mattias Persson in a press release.

"Larger rate cuts, with 50 points, cannot be ruled out if inflation and inflation expectations surprise clearly on the downside," says Daniel Bergvall, SEB's forecasting chief, in a separate press release.

Boosts Purchasing Power

The repo rate is currently at 3.50 percent after two rate cuts since May.

The expected rate cuts will keep many households in good spirits as they boost purchasing power – which has been pressured by several years of inflation and interest rate hikes, according to SEB's economists.

"The share of households with variable interest rates has increased to over 70 percent, which means that household finances will quickly improve if interest rates are cut as expected. Real wages are now increasing gradually, and households will also receive strong support from expansionary fiscal policy in both 2025 and 2026," they write in the press release.

Fiscal policy is also shifting towards a more expansionary direction in the coming years, according to the bank economists.

"The government is investing a total of SEK 75-80 billion in unfunded reforms in 2025," writes SEB in its forecast.

"Overall, we expect new initiatives equivalent to the announced budget space of SEK 60 billion in 2025 and the same amount in the election year 2026," writes Swedbank.

The labor market is lagging behind as usual, but will also strengthen eventually.

"When GDP growth takes off in 2025, employment will start to rise slowly, followed by a stronger recovery in 2026, when the employment rate at the end of the year will almost reach 70 percent," writes the bank.

Growth Accelerates in 2025

Mattias Persson at Swedbank sees a shift in the driving force behind growth going forward.

"Household incomes are now rising faster than prices, which strengthens household purchasing power. We expect high consumption growth from the beginning of next year, when interest rates have fallen further and unemployment is no longer increasing. On the other hand, we expect both exports and investments to grow more slowly this year and next year," he says.

Swedbank's and SEB's economists expect a boost for growth in 2025 and an even stronger recovery for the Swedish economy – after years of inflation and interest rate shocks – in 2026.

Swedbank's economists are raising their growth forecast for this year to 0.3 percent, up from 0.1 percent in the previous forecast. For 2025, they are lowering the forecast to 2.6 percent, from 2.9 percent, while 2026's growth is estimated at 3.0 percent.

SEB's economists expect growth of 0.6 percent this year, followed by 2.6 percent in 2025 and 2.9 percent in 2026.

Both major banks expect the Swedish Central Bank to cut the repo rate from today's 3.50 percent to 2.75 percent by the end of 2024, down to 2.00 percent in 2025.

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By TTThis article has been altered and translated by Sweden Herald

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