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Sweden’s central bank has cut interest rates and signalled it could make three more reductions this year as the Scandinavian country tries to reinvigorate its weak economy.
The Riksbank reduced its main policy rate by 25 basis points to 3.5 per cent on Tuesday, and said it could cut up to three more times this year — faster than its assessment when it started easing monetary policy in May — if inflation remained under control.
It said a weak growth outlook in Sweden and abroad justified the cut as economists wait to see whether the European Central Bank and US Federal Reserve will lower borrowing costs at their next meetings in September.
Sweden has been one of Europe’s worst performing economies this year, with its statistics agency warning this week that multiple indicators suggested it was in “clear recession”.
House prices have fallen sharply in the largest Nordic economy as Swedish borrowers are particularly sensitive to interest rate changes owing to the short fixed terms of many mortgages. Unemployment is also rising.
“There are simply few arguments to keep the policy rate at restrictive levels as inflation is under control, the labour market is weakening, and global rates have come down, reducing the depreciation pressure on the krona exchange rates,” said economists at Nordea, the region’s largest bank.
The Swedish krona gained 0.4 per cent following the decision to reach 11.36 against the euro, its strongest level in six weeks. Investors, who had widely anticipated Tuesday’s decision, are pricing in three more cuts by year-end.
The Riksbank’s monetary policy has been closely followed since the 2008 global financial crisis. Rate rises in 2010 were criticised by Nobel Prize-winning economist Paul Krugman as “sadomonetarism”, while it was the first central bank to introduce negative rates in 2015, keeping them for four years as it sought to stave off deflation.
It was one of the first western central banks to start lowering interest rates after the Covid-19 pandemic and an inflationary surge fuelled by Russia’s invasion of Ukraine, when it cut rates to 3.75 per cent in May, its first reduction in eight years.
Erik Thedéen, the Riksbank’s governor, told the Financial Times that the US had outpaced Sweden and Europe in terms of both economic and productivity growth, leading to a divergence in monetary policy.
Sweden’s preferred measure of inflation has been below the Riksbank’s 2 per cent target since June, giving it room to support the economy. Economists at Swedbank said the central bank’s guidance of two or three rate cuts this year was “softer than we expected”, while others called it “dovish”.
Thedéen told the FT last year that the country’s gang violence problems, which have led to Sweden having the highest number of fatal shootings per capita in Europe, could hurt its long-term growth prospects.
Additional reporting by Tommy Stubbington in London
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