Will the ECB follow suit soon?
Sweden’s central bank is pushing ahead with interest rate cuts
May 8, 2024, 2:06 p.m
Listen to article
This audio version was artificially generated. More info | Send feedback
Central banks around the world are considering looser monetary policy. The Swedish central bank is now pushing forward with an interest rate cut, and further steps may follow soon. However, experts warn that the crown could come under pressure if the ECB and Fed do not also change course.
Sweden’s central bank is reversing course and lowering interest rates for the first time in eight years. The central bank lowered key interest rates by 0.25 percentage points to 3.75 percent, as it announced in Stockholm. After a total of eight interest rate increases in the fight against stubborn inflation, inflation in Sweden is now close to the monetary authorities’ target of 2.0 percent. At times the inflation rate was over ten percent. If the inflation outlook does not change, the key interest rate is expected to be cut twice more in the second half of the year, the Riksbank said.
After a two-year period of interest rate hikes, central banks around the world are now weighing up when they should begin easing their monetary policy. But determining the right time is proving difficult for many central banks as geopolitical tensions have increased and there is still uncertainty as to whether inflation will sustainably fall to the desired inflation level. In the euro zone, the European Central Bank (ECB) is expected to lower interest rates again for the first time in June.
The Swedish central bank’s move was as expected. Now the focus among economists is on the question of how quickly monetary policy should be further relaxed. “We have planned a break for the June meeting, followed by three more rate cuts by the end of the year,” said Capital Economic’s chief Europe economist. However, if the inflation data for April and May are lower than expected and the krone does not weaken further, a further interest rate cut in June is likely.
Is the crown under pressure?
However, the Riksbank is concerned that the easing of exchange rates could put pressure on the krona. According to experts, this could happen if the ECB and the Federal Reserve in the USA stick to their respective high interest rate policies for longer in their monetary policy. The Riksbank wants to proceed with corresponding caution: “The future adjustment of monetary policy should therefore be characterized by caution, with gradual reductions in the key interest rate.”
The krone is currently trading against the euro at roughly the same level as it was during the global financial crisis of 2008 to 2009. Sweden’s central bank last cut interest rates at the beginning of 2016. At that time, the key rate was reduced to minus 0.50 percent – a record low that had never been reached before.