Swedish central bank holds key rate, sees chance of cut ahead

By Simon Johnson

STOCKHOLM, May 8 (Reuters) - Sweden's central bank kept its key rate unchanged at 2.25% as expected on Thursday amid widespread uncertainty about how global trade tensions will affect the economy and inflation, but opened the door to rate cuts ahead.

Households and businesses in Sweden have already felt the chill from what Finance Minister Elisabeth Svantesson called a "new economic era" ushered in by U.S. President Donald Trump's tariff policies.

But how deep the downturn will be and how long it will last is uncertain and parts of the economy, like the manufacturing sector, are showing resilience, clouding the outlook for rates.

"If we have ... a weaker economy and somewhat lower price pressure, that could potentially motivate easier monetary policy and things are pointing a bit in that direction," Governor Erik Thedeen told reporters.

"The other scenario is a weaker economy still but where trade barriers and supply disruptions and such push inflation higher - a kind of stagflation scenario - and then it would not be right to cut rates."

The Riksbank said it would wait for more clarity before acting, but some analysts expect a cut very soon.

"The Riksbank will resume cutting the policy rate already at the next meeting in June, followed by a cut in September to 1.75%," Swedbank said in a note.

Nordea, however, said it expected no change in the Riksbank's policy rate going forward.

UNCERTAINTY

Central banks are struggling to map out the road ahead given the unpredictability of President Donald Trump's tariff plans.

"The big thing here is the gigantic policy uncertainty here - where does the U.S. administration want to take this?," Thedeen said.

The Riksbank said tariffs were likely to keep a lid on prices ahead pointing to lower global demand, a stronger crown and the potential for China to redirect goods to Europe if the U.S. market is closed.

However, the U.S. Federal Reserve - which kept its key rate on hold on Wednesday - warned that risks that inflation could pick up were increasing. Thedeen noted higher U.S. inflation could spill over into Europe.

Analysts in a Reuters poll had been unanimous in seeing the Riksbank sticking to its wait-and-see stance given the opaque outlook, inflation that is still running a bit too hot and mixed signals about the strength of the economy.

Norway's central bank also left its key rate on hold on Thursday.