The Riksbank cuts interest rates by 0.25%

2024-14

Photo by Tom Samuelsson on Unsplash

As expected, yesterday the Riksbank decided to lower interest rates by 0.25% to 3.5% and said that rates could be cut another two or three times this year. This was the second cut since it lowered interest rates in May from 4% to 3.75%.

In motivating the decision, the Riksbank pointed to the continued decline in inflation, noting that annualised price changes over periods shorter than a year were close to 2%. It viewed the prospect for maintaining inflation around the target as good.

Sweden is experiencing a mild recession, with real GDP being broadly constant since the end of 2021. This slowdown is due to the Riksbank’s tight monetary policy, which has led to weakness of the interest-sensitive components of spending. The global growth outlook has weakened, and the geopolitical situation remains tense. There are political pressures outside of Sweden for increased protectionism, which could have implications for monetary policy both abroad and domestically.

Looking ahead, the Riksbank felt that the interest rates could be cut more rapidly than it had previously thought. For instance, while it predicted in June that interest rates would be cut to 3% by March 2025, yesterday it indicated that level may already be reached by November this year.

Source: Riksbank

While inflation has been returned to the Riksbank’s target, geopolitical tension could trigger new supply shocks that could give a powerful jolt up or down to inflation. Similarly, economic activity could soften or strengthen in unexpected ways as questions remain about the likely evolution of economic policy abroad. Given this uncertainty, the Riksbank argued that it would be appropriate to lower interest rates gradually.

Provided that inflation remains around target and economic activity stays weak, the Riksbank’s plans for further interest rate reductions are realistic. But a longer and deeper patch of low economic activity, perhaps triggered by a further weakening of the US or euro area economies, could lead it to cut rates more aggressively. The risks to interest rates are to the downside.

The work reported here is preliminary and may be subject to errors. It should not be seen as constituting investment advice. Readers are advised to seek professional investment advice.