KPIF inflation unexpectedly fell to 1.5 percent in December, according to fresh data from Statistics Sweden (SCB), down from 1.8 percent in November.
The average forecast before the report predicted a decline to 1.7 percent, according to Bloomberg.
– Core inflation, excluding energy prices, is right at the target. Combined with a weak economy, this strengthens the case for the Riksbank to cut rates in January, says Torbjörn Isaksson, chief analyst at Nordea.
Olle Holmgren, an economist at SEB, concurs:
– This reinforces the view that inflation is close to the target. It also increases the likelihood of the Riksbank lowering the policy rate in January.
Mattias Persson, chief economist at Swedbank, shares this perspective.
– The Riksbank could continue lowering rates in January. This also points to the possibility of further cuts ahead, he says.
– There is room for a more aggressive approach than the Riksbank has indicated, he adds.
The KPIF measure, which excludes the impact of mortgage rates, serves as the Riksbank's benchmark for its 2.00 percent inflation target. However, given the volatility of energy prices, particularly in winter, much of the focus remains on core inflation, which also excludes energy prices.
Core inflation in December dropped to 2.1 percent, down from 2.4 percent in November.
Including all consumer prices, CPI inflation fell sharply, halving to 0.8 percent from 1.6 percent.
Last year, the Riksbank reduced the policy rate five times, from 4.00 percent to 2.50 percent. Its forecasted rate path suggests another reduction of 0.25 percent to 2.25 percent could occur in early 2025.
In the interest rate market, the likelihood of a January rate cut rose to 72 percent following the unexpectedly weak December figures, up from 60 percent on Tuesday.
SEB and Nordea are both predicting two more rate cuts this year, bringing the policy rate down to 2.00 percent. This is despite core inflation trending slightly above the target.
Factors influencing these expectations include the unexpectedly sluggish economic recovery and the weak performance of Swedish consumer spending.