Sweden's central bank kept its key interest rate unchanged at 4.00% on Thursday, as expected, but said it might be able to bring forward the timing of a first rate cut, possibly even to the first half of 2024.
The pace of inflation globally has been dropping fast, fuelling expectations that major central banks will start to ease policy soon. Markets are betting both the U.S. Federal Reserve and the European Central Bank will cut rates by the middle of the year.
"The Executive Board now assesses that there is less risk of inflation becoming entrenched at levels that are too high," Sweden's central bank said in a statement.
"If the prospects for inflation remain favourable, the possibility of the policy rate being cut during the first half of the year cannot be ruled out."
Markets have been expecting a dovish shift in the Riksbank's outlook for some time as a result of lower inflation and a sharp slowdown in the Swedish economy.
"We would not completely rule out a first rate cut in March, depending largely on the January and February inflation data, but think May is still more likely," said Andrew Kenningham, Chief Europe Economist at Capital Economics.
"We then anticipate rates falling by 100bp to 3.0% by the end of this year."
Other economists see a cut in June as more likely.
Markets are pricing in a cut by June and the key rate ending the year at around 3.00%, a view largely unchanged by the Riksbank's statement.
The central bank did, however, sound a note of caution, saying that excluding volatile energy prices, inflation remained too high.
Inflation could pick up again, it said pointing to risks of a supply shock resulting from the conflict in the Middle East, corporate pricing behaviour and a substantial weakening of the Swedish currency.
"Monetary policy therefore needs to be adapted cautiously to ensure that inflation is stabilised sustainably close to the target," it said.
The Swedish crown eased against the euro after the rate decision.
The central bank also said it would increase the pace of bond sales from February to 6.5 billion Swedish crowns ($622.89 million) from 5 billion currently.
($1 = 10.4353 Swedish crowns)
