On Wednesday, the Swedish central bank Riksbank cut its policy rate to 3.75% from 4%, as was expected. This is the first rate reduction since 2016, while two more rate cuts are anticipated in the second half of this year. The news weighed on the Swedish krona (SEK).
The Riksbank acted ahead of the European Central Bank, as the central bank in Stockholm is trying to help revitalise Sweden’s recession-stricken economy. The Swedish central bank is the second among major central banks in the developed world to cut rates following the Swiss National Bank who surprised markets by lowering its main policy rate to 1.5% back in March. The Czech and Hungarian central banks have also cut their interest rates.
In its statement, the Riksbank noted:
“Inflation is approaching the target while economic activity is weak. The Riksbank can therefore ease monetary policy. The executive board has decided to cut the policy rate by 0.25 percentage points to 3.75%. 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.”
The minutes of the meeting will be published on 15 May.
Who’s next?
The question now is which central bank moves next? With inflation easing and economic activity slowing down, Sweden’s Riksbank had to act accordingly. The European Central Bank has signalled a rate cut for the 6th of June if inflation continues to cool off.
In the US, inflation has stayed persistently higher than expected, with the Federal Reserve anticipated to keep interest rates higher for longer.
In the UK, a first rate cut is expected by August, and another cut before the end of the year, most likely in November.
Further rates cuts by the Riksbank
With an interest rate-sensitive economy, analysts expect further rate cuts this year by the Riksbank. However, the Swedish central bank is cautious due to ongoing concerns related to the strength of the US economy, geopolitical tensions, and a weak krona.
The Riksbank hiked rates aggressively over the past couple of years to help support the value of its currency. Policymakers have also stressed that they needed to stay out in front of the ECB during the hiking cycle.
A weaker currency according to Governor Thedeen is the major risk to inflation, and the committee has signalled its intention to cut rates only twice more this year.
However, today’s move suggests that there are domestic economic concerns after Sweden’s economy contracted for four quarters in a row. Additionally, the jobs market is cooling more than elsewhere. Core inflation remains elevated in some areas but is now much closer to target.
As Daniel Kral, lead economist at Oxford Economics, said, “Inflation has surprised on the downside recently and is close to target, longer-term inflation expectations remain anchored, wage rises are moderate, and the economy is weak. These were the factors that tilted the balance for the Riksbank to start the easing cycle.” He noted that the Riksbank may remain on hold at its next meeting at the end of June, but a rate cut was anticipated in the third quarter and two more in the fourth quarter, with an end-year policy rate of 3%.