The German inflation rate has, with the fall in August, now reached its lowest level since 2021. The decline was not only large, but also larger than expected.
Market interest rates fell immediately after the figures and in pricing, a reduction of the key interest rate from the European Central Bank (ECB) in September is now fully priced in.
Could be a series of interest rate cuts
Earlier on Thursday, an unexpectedly weak Spanish inflation figure for August was also released, as well as state figures from Germany, which pointed in the same direction, also contributing to the downward pressure on interest rates.
It's not decisive for the very next interest rate decisions from the Swedish Central Bank – whether the ECB lowers or not. But if it becomes clear that the ECB also lowers, it will also become clearer that we will get a whole series of interest rate cuts from the Swedish Central Bank, says Torbjörn Isaksson, chief analyst at Nordea.
He adds that the August figures from France, Italy, and the entire eurozone on Friday will also play a major role in how the ECB handles the key interest rate.
A reduction of the key interest rate from the ECB in September would be the second this year, after the reduction in June.
We'll see how the outcome is in the other countries, says Isaksson.
Counting on seven cuts
As for the Swedish key interest rate – which, according to the Swedish Central Bank's latest announcement, can be lowered another two or three times this year – the market is currently counting on a halving of the key interest rate down to 1.75 percent by the end of 2025. The probability of this (i.e., seven cuts) is currently 100 percent in pricing.
It's more cuts than we have in our forecast right now, says Isaksson.
He is counting on four cuts of 0.25 percentage points each by the Swedish Central Bank until the beginning of 2025, down to 2.50 percent. Then the forecast is uncertain, according to Isaksson.
The Swedish Central Bank can lower a few times until 2025, you can't rule it out. But it's an upside risk in the market's pricing as it looks right now.
The Swedish Central Bank's key interest rate – which has been raised to unusually high levels during the inflation and interest rate shock of 2022–2023 – affects, among other things, variable mortgage rates and other interest rates in the Swedish economy.
When the key interest rate is lowered, the idea is that it should increase lending in the economy and thus stimulate demand and inflation. If the rate is raised, it aims to curb lending, demand, and inflation.
If mortgage rates were to be lowered by 1.75 percentage points by the end of 2025, the interest cost for a mortgage of three million kronor would be reduced by 52,500 kronor per year or 4,375 kronor per month, disregarding the effects of interest deductions.
