Riksbank expected to cut rates to 2% amid economic rebound: ING

AI Sentiment: Bullish
Reason: The article discusses the robust economic rebound in Sweden, with a growth of 6.4% in Q3 and a predicted GDP increase of 4.7% in 2021. The Riksbank is considering a rate cut to manage inflation and debt risks.

Sweden's central bank, the Riksbank, is predicted to slash interest rates to -0.2% amid the country's robust economic rebound, according to a forecast by the Dutch multinational banking and financial services corporation ING. The Riksbank, which has been grappling with the challenge of reviving inflation while also managing debt risks, is expected to announce its policy decision on December 16.

The proposed rate cut comes as a surprise, as the Riksbank has been the only major central bank in the world to exit negative interest rates during the pandemic. However, the ING economists believe a return to negative rates is a possible scenario considering the strong economic recovery and high inflation figures in Sweden. The country's economy has been performing well above expectations, with a growth of 6.4% in Q3 and 2021's GDP forecasted to increase by 4.7%.

Despite the strong growth, the inflation rate in Sweden has been rising rapidly, outpacing the Riksbank's target of 2%. The consumer price index (CPI) rose by 3.3% in November, its highest level in 13 years, primarily driven by soaring energy prices. According to ING, the Riksbank might consider a rate cut to bring back inflation to its target rate.

Moreover, the potential rate cut could also be a response to the European Central Bank's (ECB) recent decision to extend its pandemic emergency purchase program (PEPP) until March 2023. The extension of the ECB's stimulus measures might have implications for the Riksbank's policy and could trigger the need for a rate cut.

However, the rate cut comes with its own set of challenges. A negative interest rate could stimulate the housing market, which is already overheating, and increase the household debt levels in Sweden. Therefore, a balanced approach is needed to ensure that the rate cut does not lead to financial instability.

In conclusion, it remains to be seen how the Riksbank will navigate these complex economic scenarios. Regardless of the outcome, the upcoming policy decision will be highly anticipated and is likely to have significant implications for Sweden's economy.