Sweden central bank cuts interest rate for first time since 2016

May 08, 2024 (MLN): Sweden’s central bank cut its benchmark interest rate for the first time in eight years, lowering its policy rate by 25bps to 3.75%.

In a press release issued today, the Riksbank said that inflation is approaching the target while economic activity is weak.

If the outlook for inflation still holds, the policy rate is expected to be cut two more times during the second half of the year, it said.

The move makes the Swedish central bank the second among advanced-world peers after the Swiss National Bank to embark on post-pandemic easing and shows how approaches are differing after the US Federal Reserve’s plans to cut rates were derailed by stubborn inflation pressures and a thriving economy, as Bloomberg reported.

The Swedish krona fell after the decision, sliding as much as as 0.6% to hit the day’s low of 11.7561 per euro.

The moves put the currency closer to the weakest level of the year, of 11.7709, reached in late April.

“We have come a long way, but I will never say that we have defeated inflation because my job is to always be vigilant,” Governor Erik Thedeen told reporters in Stockholm. “There is room to act independently, and we have to use that because our mandate is to bring Swedish inflation to 2%.”

Two-thirds of economists surveyed by Bloomberg had expected the Riksbank to cut, while the rest reckoned borrowing costs would be kept unchanged.

The choice to reduce rates now signals that the domestic situation, with subsiding inflation and a sputtering economy, takes precedence over any concern that moving ahead of bigger peers will lead to another bout of krona weakening that in turn would fuel import prices.

“Actions speak louder than words, and the fact the Riksbank has cut rates today tells us that domestic economic concerns are starting to dominate the debate within the policy committee,” James Smith, a developed markets economist, and Francesco Pesole, an FX strategist at ING Groep NV, said in a note to clients. “Sweden’s economy has contracted for four quarters in a row now, while the jobs market is cooling more appreciably than elsewhere.”

The global tightening campaign since the pandemic abated had an outsized impact on the Swedish economy, because a high proportion of loans in the Nordic country have rates fixed on short terms.

The lower rate will ease constriction on the economy, providing respite to indebted citizens and companies, and help bring about conditions for an economic recovery.

For the currency, the decision was unwelcome.

“The decision to front run other relevant central banks is, as we expected, putting pressure on the krona,” Stefan Mellin, senior strategist at Danske Bank A/S in Stockholm said. “Of course, this cannot come as a surprise for the Riksbank either.”

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