Sweden's Riksbank trims interest rates

8th May 2024 08:14

(Sharecast News) - Sweden's central bank trimmed interest rates on Wednesday, for the first time since 2016.

In an unanimous decision, Riksbank reduced the cost of borrowing by 0.25 percentage points to 3.75%, arguing that while inflation was approaching target, economic activity was weak.

It also flagged further possible cuts, noting: "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."

Central banks around the world have hiked rates as they looked to tackle surging inflation.

With inflation now easing, however, many - including the Federal Reserve and Bank of England - are now expected to start cutting rates. But so far few have taken action.

The Swiss National Bank was the first major central bank to ease monetary policy in March, when it cut by 0.25 percentage points - the first reduction in nine years. The Czech and Hungarian central banks have also trimmed rates recently.

But the BoE is due to publish its latest decision on interest rates on Thursday, and is widely expected to leave the cost of borrowing on hold at 5.25%.

Riksbank said on Wednesday: "Monetary policy and fading supply shocks have contributed to inflation falling and now being close to target.

"When inflation approaches the target while economic activity is weak, monetary policy can eased."

However, it also sounded a note of caution, arguing there was uncertainty "on both the upside and downside".

"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 adjustment of monetary policy going forward should therefore be characterised by caution, with gradual cuts to the policy rate."

Daniel Kral, lead economist at Oxford Economics, said: "Inflation in March surprised on the downside, with headline CPIF coming in at 2.2%, significantly below the Riksbank's latest forecast of 2.7%.

"Moreover, longer-term inflation expectations remain anchored, wage rises are constrained by the two-year wage agreement from last year and the flash first quarter GDP pointed to another small contraction.

"These factors tilted the balance towards the Riksbank starting the easing cycle now.