Sweden’s Riksbank has reduced borrowing costs by a quarter point, lowering the interest rate to 3.25% as part of efforts to invigorate a sluggish economy. The central bank hinted at the possibility of more significant cuts in the coming months.
Future Rate Cuts Expected
In a statement on Wednesday, the Riksbank indicated that further easing could lead to a notable reduction in the benchmark rate by the end of 2024. “The policy rate may also be cut at the two remaining monetary policy meetings this year,” officials noted, adding that a 0.5 percentage point reduction could occur at one of these meetings.
Economists’ Predictions
This move was anticipated by all 23 economists surveyed by Bloomberg, although some speculated about the chance of a larger cut similar to the U.S. Federal Reserve’s recent action. Kyle Chapman, a foreign exchange strategist, believes that the Riksbank will need to adopt a more aggressive stance, predicting two 50 basis-point cuts before the year ends.
Inflation and Economic Conditions
Governor Erik Thedeen and his team have been encouraged by a slowdown in inflation since early last year, which has created room to support one of the region’s underperforming economies. Inflation measures have fallen below the Riksbank’s target of around 2%.
Addressing Economic Challenges
With sluggish growth and rising unemployment, demands for rate cuts have intensified. The Riksbank stated that its new guidance aims to tackle these economic challenges. “These changes imply a relatively large shift of monetary policy in a more expansionary direction, which will improve households’ finances and facilitate business investments,” the central bank explained.
Currency Reaction to Rate Cuts
The potential for a half-point cut led to a decline in the Swedish krona, which fell 0.4% to 11.3313 per euro. The currency had been strengthening since late July, reaching its highest value against the euro in nearly three months, based on expectations of smaller cuts this year.
Economic Outlook for Sweden
Despite avoiding severe inflationary scenarios, Sweden’s economy has been stagnant for nearly three years, with a 0.3% contraction in output recorded for the second quarter. However, a recovery is projected to gain momentum toward the end of this year and into 2025, aided by tax cuts and increased spending from an expansionary budget proposal announced earlier this month.
Revised Inflation Forecasts
The Riksbank has lowered its forecasts for CPIF inflation for this year and next, predicting that both measures will fall short of the target more than previously expected. The economy is expected to grow by 0.8% this year—below earlier projections—but should accelerate to 1.9% in 2025.
Expert Insights on Monetary Policy
“The Riksbank still appears to be in control of price increases, and signs of a slowing economy are increasing,” noted Lars Kristian Feste, head of fixed income at Lannebo Kapitalforvaltning. While the Riksbank may consider larger cuts later this year, he believes they will likely stick to quarter-point reductions at the next two meetings unless inflation drastically decreases.
Conclusion
As the Riksbank navigates these economic challenges, its commitment to adjusting monetary policy will be crucial in shaping Sweden’s economic recovery and addressing inflationary pressures moving forward.
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