Riksbank Kicks Off Easing With First Rate Cut Since 2016

(Bloomberg) — The Riksbank cut its benchmark interest rate for the first time in eight years, acting before the neighboring euro zone in a bid to offer respite to Sweden’s recession-stricken economy.

The central bank in Stockholm lowered its policy rate by a quarter point to 3.75% and said it could be reduced twice more in the second half of the year, according to a statement on Wednesday.

The move makes the Swedish central bank the second among advanced-world peers after the Swiss National Bank to embark on post-pandemic easing and shows how approaches are differing after the US Federal Reserve’s plans to cut rates were derailed by stubborn inflation pressures and a thriving economy.

The Swedish krona fell after the decision, sliding as much as as 0.6% to hit the day’s low of 11.7561 per euro. The moves put the currency closer to the weakest level of the year, of 11.7709, reached in late April.

“We have come a long way, but I will never say that we have defeated inflation because my job is to always be vigilant,” Governor Erik Thedeen told reporters in Stockholm. “There is room to act independently, and we have to use that because our mandate is to bring Swedish inflation to 2%.”

Two-thirds of economists surveyed by Bloomberg had expected the Riksbank to cut, while the rest reckoned borrowing costs would be kept unchanged.

The choice to reduce rates now signals that the domestic situation, with subsiding inflation and a sputtering economy, takes precedence over any concern that moving ahead of bigger peers will lead to another bout of krona weakening that in turn would fuel import prices.

“Actions speak louder than words, and the fact the Riksbank has cut rates today tells us that domestic economic concerns are starting to dominate the debate within the policy committee,” James Smith, a developed markets economist, and Francesco Pesole, an FX strategist at ING Groep NV, said in a note to clients. “Sweden’s economy has contracted for four quarters in a row now, while the jobs market is cooling more appreciably than elsewhere.”

The global tightening campaign since the pandemic abated had an outsized impact on the Swedish economy, because a high proportion of loans in the Nordic country have rates fixed on short terms. The lower rate will ease constriction on the economy, providing respite to indebted citizens and companies, and help bring about conditions for an economic recovery. 

For the currency, the decision was unwelcome.

“The decision to front run other relevant central banks is, as we expected, putting pressure on the krona,” Stefan Mellin, senior strategist at Danske Bank A/S in Stockholm said. “Of course, this cannot come as a surprise for the Riksbank either.”

What Bloomberg Economics Says:

The Riksbank’s timing of its first rate cut — preceding similar steps in most other major central banks — will mount pressure on the already weak krona. The resulting upward push on price gains means the central bank will likely need to keep policy tight for longer from here — cutting rates three times in total this year, down from our earlier call of four.

— Selva Bahar Baziki, economist. For a full note, click here

Thedeen and his colleagues sought to temper expectations by charting a gradual path to easing, with the no move foreseen at the next meeting in late June, as they stressed that price increases could reaccelerate.

“The risks that may cause inflation in Sweden to rise again are primarily linked to the strong US economy, the geopolitical tension and the krona exchange rate,” the bank said. “The adjustment of monetary policy going forward should therefore be characterized by caution, with gradual cuts to the policy rate.”

Swedish consumers have cut back spending, housing construction has plunged and highly leveraged property owners have struggled to refinance maturing debt. After four consecutive quarters of contraction, hopes have now increased that the Swedish economy will begin a recovery later this year, helped by lower borrowing costs.

“The minister of finance has been very clear that she will be much more expansionary with tax cuts next year, and together with more cuts from the central bank we expect the Swedish economy to grow almost 3% next year, double the growth rate that we have for the euro area,” Mattias Persson, Swedbank AB chief economist, said in an interview on Bloomberg TV. “That also speaks in favor of the Swedish krona strengthening going forward.”

–With assistance from Anton Wilen, Joel Rinneby, Love Liman, Christopher Jungstedt, Zoe Schneeweiss, Naomi Tajitsu and Cagan Koc.

(Updates with comments from economists, Thedeen from fifth paragraph)

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