07:46 AM EDT, 09/24/2025 (MT Newswires) -- One of two G10 central bank meetings took place on Tuesday and resulted in a surprise decision with Sweden's Riksbank cutting the key policy rate by another 25bps to 1.75%, said MUFG.

OIS pricing before the meeting implied about a one-third chance of a cut, so the decision certainly surprised most of the market, wrote the bank in a note to clients. But as is often the case, the communication accompanying the surprise cut was more of the focus and the suggestion of this cut possibly being the last helped fuel the krona's( SEK) strength initially.

The key swing factor persuading the Riksbank to cut was likely the inflation data earlier this month, stated MUFG. The CPIF excluding energy month-over-month 0.5% drop helped lower the annual rate to 2.9% with the headline rate at just 1.1%.

The statement did cite inflation as still elevated, so it was more the drop that encouraged the cut than the level. But the Riksbank cited evidence that this elevated inflation would be "transitory" -- companies' favourable pricing plans were the example given. The statement confirmed the view that the policy rate would remain at the current level for "some time to come."

That was underlined by the forecasts from the Riksbank, with the policy rate effectively unchanged in both 2026 and 2027. With rates unchanged, the CPIF inflation measure is projected at just 1.0% in 2026, way down on the June forecast of 1.7% before then rising to 1.7% in 2027, below the June estimate of 2.0%.

That's quite a divergence from the June projections and as such, while the guidance suggests Tuesday's reduction could be the last, there could certainly be plausible scenarios in which MUFG sees further cuts from the Riksbank.

It is certainly telling how the inflation backdrop appears so much more favorable in Europe than in the United Kingdom or the United States, added the bank.

In a potential global backdrop of investors seeking safe havens from inflation risks, SEK could certainly see some further outperformance if inflation falls as expected, pointed out MUFG. SEK is the top-performing G10 currency this year, followed by Norway's NOK and then the Swiss franc (CHF).

Part of this is a valuation story -- SEK and NOK throughout the global inflation shock period were very often the worst-performing currencies and the most undervalued. So this undervaluation is correcting and after an 18.5% gain for SEK this year and 15% gain for NOK, the upside momentum from an undervaluation perspective will fade from here, according to the bank.

Still, given MUFG's US dollar (USD) bearish view and its target of 1.2500 for EUR/USDm, the bank sees further gains for NOK and SEK mainly against the US dollar by mid-2026 (6%-7%) and more modest gains versus the euro. (1%-2%).