(Bloomberg) -- Officials at Sweden’s Riksbank discussed the option of a half-point reduction in borrowing costs at their meeting last week when they opted to cut the benchmark rate by 25 basis points.
Most of the five executive board members signaled that more gradual cuts add predictability and better address uncertainty in the current system where rate meetings are more frequent, according to the minutes published on Monday of the monetary-policy meeting held on Aug. 19.
Governor Erik Thedeen and his deputies “quite naturally in the prevailing situation,” discussed whether a bigger cut in borrowing costs would be justified, according to his remarks.
The central bank last week announced its second quarter-point cut in borrowing costs since May, bringing the benchmark rate down to 3.5% and flagging it may continue to reduce the key interest rate at all of its remaining three meetings this year. The more dovish stance, in line with market expectations, came as inflation has fallen below the policymakers’ target and the largest Nordic economy is faltering.
“I have considered a cut of 0.5 percentage points at today’s meeting, but I feel confident that a 0.25 percentage points is a well-balanced monetary policy,” First Deputy Governor Anna Breman said.
The Riksbank isn’t in a situation with a sharply changing economic outlook and inflation developments and it now has eight policy meeting per year versus five in 2022, reducing the need for cuts, she said. That contrasts with the hikes the central bank pushed through in larger steps when inflation was skyrocketing, she said.
Sweden’s rate-setters have faced growing pressure for more rapid monetary easing recently as inflation has undershot the bank’s 2% target since June and the Nordic nation’s consumers remain under pressure from high borrowing costs.
What Bloomberg Economics Says...
“Fueled by optimism on the inflation outlook, on balance, we see the Riksbank Executive Board’s rates path evenly split between their suggested two to three more cuts this year. With the recent escalation in the Middle East war adding to inflationary concerns since the August meeting, we maintain our call for two more cuts — for now. Risks to the outlook are tilted for further cuts, especially if price developments surprise to the downside.”
—Selva Bahar Baziki, economist. Click here to read more.
Last week’s plan, conditional on an unchanged inflation outlook, means rates could be as low as 2.75% at the end of the year, compared with a bottom of 3% guided in June.
“Four out of five board members discussed the possibility of cutting rates by 50 basis points at this meeting but argued in favor of more moderate steps,” analysts at Swedbank AB said in a note to clients. “Our impression is that for a 50 basis-pint cut to be realized in September, we would need to see either a financial market collapse or a marked worse economic development (lower inflation, higher unemployment).”
Still, some analysts have said Swedish policymakers can’t deviate much from the European Central Bank to avoid renewed weakening of its currency. The weakness of the krona — which may fuel imported inflation — still remains a concern, according to several of the officials, even after growing odds of rate cuts in the euro area and the US have soothed some of that worry.
“Although the exchange rate has remained relatively stable during the financial turmoil in the summer, the krona and its impact on prices remain a continued risk for inflation,” Deputy Governor Aino Bunge said. “As I mentioned earlier, there are clear signs that companies’ pricing behavior has normalized, but changes in the cost and demand situation may change this picture.”
Governor Thedeen said a bigger rate-cutting move “would require more than just isolated negative economic outcomes or temporary market movements.”
--With assistance from Jonas Ekblom, Christopher Jungstedt, Rafaela Lindeberg and Charles Daly.
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