Sweden’s central bank cuts interest rate to 3.75% as economy struggles, signals further easing ahead

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In a move widely anticipated by financial markets, Sweden’s central bank announced a reduction in its key interest rate from 4.00% to 3.75% on Wednesday. The bank also signaled its intention to implement two additional rate cuts in the latter half of the year, provided that inflationary pressures remain subdued.

This decision comes after a period of two years during which central banks worldwide have been contemplating the timing of a shift from tightening to easing monetary policy. However, the timing of these adjustments is proving to be challenging, as policymakers are closely monitoring geopolitical tensions and striving to bring inflation levels back within target ranges.

In March, the Riksbank had already indicated the possibility of rate cuts in May or June, and recent data has confirmed that inflation is expected to stabilize around 2%, following a peak of over 10% in late 2022.

Riksbank Governor Erik Thedeen stated that if the economic outlook remains unchanged, the bank could implement two additional rate cuts in the latter part of the year. The focus is now on the pace at which these rate cuts will be executed.

Nonetheless, the Riksbank remains cautious, as easier monetary policy could weaken the Swedish crown and exacerbate inflationary pressures, particularly if Sweden’s actions diverge from those of the European Central Bank and the U.S. Federal Reserve.

While the ECB is expected to lower rates in June, the Federal Reserve may delay its own easing measures. The Australian central bank recently indicated that rate cuts are unlikely in the near term, while policymakers in Norway delivered a similar message last week.

The Bank of England is set to announce its latest policy decision on Thursday, but a rate cut is not expected until June at the earliest, possibly later in the summer.

After experiencing eight rate hikes in less than two years, Sweden’s economy has slowed significantly, with many households struggling to meet mortgage payments at levels not seen in over 15 years. The Swedish economy contracted by 0.2% in 2023 and has remained weak in the first quarter of this year. The last time the policy rate was lowered was in early 2016 when it reached -0.50%, its lowest level ever.

(Source: Market Watch | Bloomberg | Financial Times)

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