Sweden’s central bank indicated that it will cut the interest rate in May or June as the economy is expected to remain mired in recession, provided the inflation prospects remain favorable.

The Executive Board of Riksbank decided to hold the policy rate at 4.00 percent on Wednesday, as expected.

Although the risk of inflation becoming entrenched at levels that are too high is continuing to decline, inflationary pressures are still somewhat elevated. The board wanted further confirmation that inflation will stabilize close to the target.

Policymakers observed the need for contractionary monetary policy declines when inflation falls towards the target and economic activity is weak.

“It is likely that the policy rate can be cut in May or June if inflation prospects remain favorable,” the bank said.

However, the board cautioned that there are risks that could cause inflationary pressures to rise again. The policy should be adjusted cautiously going forward, in the form of gradual cuts in the policy rate, the bank said.

New information as well as how it is expected to affect the prospects for the economy and inflation is decisive in determining monetary policy, the bank added.

A May rate cut is now highly likely, assuming the inflation data continues to come in favorably and the currency does not weaken materially, ING economists said.

The Bank is likely to cut rates more this year than the 70 basis-point that financial markets are currently discounting, Capital Economics’ economist Andrew Kenningham said.

Kenningham expects a first 25 bps rate cut in May, though it could well be in June, which would be after the European Central Bank and Fed meetings, and three more before the year-end.

The central bank today downgraded its inflation forecast for 2024 to 3.5 percent from 4.4 percent and that for next year to 1.5 percent from 2.4 percent. Inflation is seen at 1.6 percent in 2026, down from the prior outlook of 1.9 percent.

For 2024, the bank expects the economy to shrink 0.3 percent but to expand 1.9 percent in 2025 and 2.4 percent in 2026.