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Sweden cuts interest rates as Europe diverges from Fed
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Sweden’s central bank has cut interest rates for the first time in eight years as European policymakers diverge from the US to support their economies, even if it comes at the expense of their currencies.
O Riksbank It cut its key interest rate by 0.25 percentage points to 3.75 percent on Wednesday, the first time it has eased policy before the US Federal Reserve this century.
“We are sufficiently convinced that inflation has come down, and come down sustainably,” Erik Thedéen, governor of the Riksbank, told the Financial Times.
But he added that most risks were “on the upside,” such as a further weakening of the Swedish krona leading to an increase in imports. inflationgeopolitical risks and the continued strength of the US economy.
The reduction in Swedish rates, following recent similar measures by the Swiss, Czech and Hungarian central banks, shows Europe’s growing willingness to take a different path policy on monetary policy, economists say.
A cut expected by the European Central Bank at its next meeting would confirm this divergence. Due to the size of the U.S. economy and the outsized influence of its financial markets and the dollar, the Federal Reserve typically takes the lead in changing rates.
Following the Riksbank decision, the krona fell 0.4 percent against the dollar to 10.90 SEK and 0.3 percent against the euro to 11.71 SEK.
Sweden’s currency is the third-worst performer in the G10’s most traded group of currencies this year, down 7.5% against the dollar and 5% against the euro.
Christina Nyman, chief economist at Handelsbanken and a former Riksbank official, previously said a rate cut would put the krona under greater pressure, especially if the Fed delays its own cuts.
“It’s the currency that could potentially be a problem. Sweden is a small open economy and we depend on what happens around us,” she said.
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With US inflation remaining above expected and its economy continuing to produce solid growth, the Fed signaled last week that it was likely to maintain rates louder for longer.
However, inflation and growth in Europe have been weaker in recent months than in the U.S., opening the door for the region’s central banks to begin reducing borrowing costs ahead of the Fed.
The ECB has signaled that it is likely that start cutting rates at its next policy meeting on June 6, if price pressures continue to ease as expected. The Riksbank has already surpassed the ECB: in 2019, it abandoned negative interest rates more than two years before they ended in the eurozone.
More than two-thirds of Sweden’s imports and half of its exports are traded with the EU, making the Nordic economy sensitive to changes in the euro and the ECB’s monetary policy decisions.
But there are concerns that if rates in Europe fall faster than in the US, it would cause European currencies to depreciate against the dollar, increasing import prices and fueling higher inflation.
Thedéen acknowledged that the corona and potentially even monetary policy could be affected by a strong US economy that causes the Fed to delay rate cuts for longer than expected.
“The Riksbank is particularly interesting to watch in this episode, as the structure of the Swedish economy is closely related to the broader European economy and therefore acts more as a precursor [than Switzerland] for what might come from the ECB,” said Piet Haines Christiansen, strategist at Danske Bank.
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Sweden’s economy contracted both last year and in the first quarter of this year after a series of rate hikes led to a sharp fall in house prices and consumption, although there are signs that inflation is likely to reach Riksbank target of 2% in 2024.
Thedéen stressed that the Riksbank believed the krone was “fundamentally undervalued” as companies from neighboring countries flocked to Sweden to buy capital goods. He said there was a risk that lower rates could lead to a reduced exchange rate and therefore higher import costs, but said other inflationary factors – such as activity levels, corporate price-setting and wage growth – supported a rate cut.
The Swedish rate cut contrasts with sentiment in neighboring Norway, which is also suffering from a weak currency. Norges Bank indicated last week that it would keep rates unchanged, with some economists now expecting it not to cut until December or even next year. That would likely make it one of the last major central banks to start easing.
Additional reporting by Mary McDougall in London