Sweden’s Riksbank makes first rate cut in eight years

Stockholm — Sweden’s central bank cut its key interest rate to 3.75% from 4% on Wednesday, as expected, and said it was likely to cut the rate twice more in the second half of 2024 if inflationary pressures remain mild.

After a two-year hiking cycle, central banks around the world are weighing when to start easing policy. But the timing is proving tricky as rate setters assess geopolitical tensions and fret over getting inflation back to target levels.

Sweden’s central bank had said in March it saw a good chance to cut rates in May or June, and data since then has confirmed that inflation is set to stabilise around 2% after peaking at over 10% in late 2022.

“If the outlook doesn’t change, we can cut rates a further two times during the second half of the year,” Riksbank governor Erik Thedeen told reporters.

Most analysts in a Reuters poll had forecast a quarter point cut, the first in eight years by the Riksbank.

The focus is now on how fast rates come down.

“We have pencilled in a pause for the June meeting followed by three more rate cuts by year-end,” Capital Economics' chief European economist Andrew Kenningham said.

He said a positive surprise in inflation figures for April and May could put a June cut back on the table.

The Riksbank, however, is worried easier policy could undermine the Swedish crown and add to inflationary pressures, especially if Sweden gets out of sync with the European Central Bank (ECB) and the US Federal Reserve.

“Monetary policy needs to be characterised by caution,” Thedeen said.

The krona, which weakened after the decision was published, is trading at about the same level against the euro as during the global financial crisis in 2008-2009.

Thedeen said Wednesday’s dip in the krona was likely to be short-lived, but much would depend on how other central banks act.

The ECB is expected to cut rates in June, but easier policy from the Fed, the global bellwether for central banks, may have to wait.

Australia’s central bank warned on Tuesday rates were unlikely to come down soon while rate-setters in Norway had a similar message last week.

The Bank of England will announce its latest policy decision on Thursday with a rate cut not expected until June at the earliest and possibly later in the summer.

After eight rate hikes in less than two years, Sweden’s economy has ground to a halt and many households are struggling with mortgage payments at their highest level for more than 15 years.

Sweden’s economy shrank 0.2% in 2023 and remained weak during the first three months of the year. The last time the policy rate was lowered was in early 2016 when it fell to -0.50%, its lowest ever level.

Reuters