SWEDEN’S Riksbank cut borrowing costs by a quarter point and raised the possibility of a bigger move in coming months in its bid to spur a listless economy.
The central bank reduced its interest rate to 3.25 per cent, and outlined additional easing that is likely to take the benchmark markedly lower by the end of 2024.
“The policy rate may also be cut at the two remaining monetary policy meetings this year” and “a cut of 0.5 percentage points is possible at one of these meetings,” the Riksbank said on Wednesday (Sep 25). “The policy rate is thus expected to be cut at a clearly faster pace than was previously communicated.”
The move was expected by all 23 economists in a Bloomberg survey, although several saw an outside chance of a bigger step – matching that of the US Federal Reserve last week – that officials have now aired as a possibility in future.
“The job on inflation has been completed – and then some,” said Kyle Chapman, a foreign exchange strategist at Ballinger Group, who predicts the Riksbank will need to become even more aggressive in its response. “I see strong risks that we get two 50 basis-point rate cuts before the end of the year.”
Governor Erik Thedeen and his colleagues have been emboldened by the slowdown in price growth since early last year that’s giving them leeway to help one of the laggard economies of the region. In recent months, the measure of inflation that the central bank aims to keep around 2 per cent has even fallen some way below that target.
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With growth sluggish and unemployment rising, calls for rate cuts have mounted, and the Riksbank said its new guidance should help address those challenges.
“These changes imply a relatively large shift of monetary policy in a more expansionary direction, which will improve households’ finances and make it easier for companies to invest,” the central bank said.
The possibility of a half-point rate cut triggered selling in the krona, which fell 0.4 per cent to 11.3313 per euro. The currency had been gaining since late July, hitting its highest versus the euro in nearly three months, on the view that the Riksbank may stick to smaller cuts this year.
Sweden has avoided the most adverse scenarios, which painted it as the country in Europe that could be worst affected by inflation and rising rates.
Even so, the Nordic nation’s economy has been largely stagnant for almost three years. In the second quarter, output contracted by 0.3 per cent, according to official data.
A recovery is expected to pick up pace towards the end of this year and into 2025, when it will be helped by tax cuts and increased spending that are part of an expansionary budget proposal announced earlier this month.
The Riksbank cut forecasts for CPIF inflation for this year and the next, seeing both measures undershooting its target by more than previously. The economy will expand 0.8 per cent this year, less than it had expected, but grow faster than projected at 1.9 per cent in 2025.
“The Riksbank still appears to be in control of price increases, and the number of signals of a slowing economy is increasing,” said Lars Kristian Feste, head of fixed income at Lannebo Kapitalforvaltning in Stockholm. “While the Riksbank is opening up to a larger cut later this year, we believe they will do quarter-point cuts at the two remaining meetings unless inflation collapses completely.” BLOOMBERG
