Sweden cuts key rate for first time in eight years

Stockholm   -   Sweden’s central bank cut its key interest rate for the first time in eight years the other day, citing easing inflation and hinting at two more reductions before year-end.

The rate was reduced by a quarter-point to 3.75 percent after several years of high inflation, which has come down significantly in recent months. “Inflation is approaching the (two-percent) target while economic activity is weak,” the bank said.

The move comes almost two months after the Swiss National Bank became the first major Western central bank to lower its rates following hikes across Europe and the United States aimed at taming rising consumer prices.

The Swedish central bank cut was widely expected, after inflation slowed sharply in March to 4.1 percent year-on-year, down from a peak of 12.3 percent in December 2022. The bank’s benchmark indicator, adjusted for fixed interest rates (CPIF), reached 2.2 percent. “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.”

The bank warned there was “uncertainty” about the inflation outlook, “on both the upside and downside”. The strong US economy, geopolitical tensions and the exchange rate for the weak Swedish currency the krona could all cause inflation to rise again. “The adjustment of monetary policy going forward should therefore be characterised by caution, with gradual cuts to the policy rate,” it said. Sweden’s interest rate had been held at four percent since September 2023, its highest level since 2008. The bank’s last rate cut dated back to February 2016.

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