(Bloomberg) -- Sweden’s Riksbank cut borrowing costs by a half point for the first time in a decade, accelerating aid for a stagnant economy with the promise of more to come.
The central bank in Stockholm reduced its benchmark interest rate to 2.75%, and said that while uncertainty is larger than usual following the US election, further moves lower in December and in the first half of next year are possible. All but three of 21 economists surveyed by Bloomberg correctly predicted the magnitude of the cut.
“To further support economic activity, the policy rate needs to be cut somewhat faster than was assessed in September,” the Riksbank said in a statement on Thursday. “It is important in itself that economic activity strengthens, but it is also a necessary condition for inflation to stabilize close to the target.”
The decision keeps Sweden at the vanguard of global easing as its central bank responds to a rapid loss of price pressures in an economy that is struggling to pick up. The Riksbank sees inflation staying below the 2% target some time into next year, raising the specter of it becoming entrenched at a low level.
At a press conference in Falun, Sweden, Riksbank Governor Erik Thedeen said uncertainty about the economic development is unusually high following Donald Trump’s US election win. He cautioned that import tariffs the president-elect has outlined could hit Swedish exports.
While trade barriers and tariffs typically lead to higher inflation, “that should be weighed against the risk of a weaker economic development, which could dampen inflation,” the governor said. “It would be unfortunate for the global economy, and not least for a country like Sweden, if we end up in a comprehensive trade war.”
The Swedish krona pared gains against the euro after the decision to trade around 11.63, up about 0.2% on the day. The krona hovers near a three-month low versus the common currency, and has lost more than 4% so far this year.
“The decision was in line with expectations, though I personally think it would have been good for them to save some ammunition in case there is a large need of economic stimulus,” Lars Kristian Feste, head of Fixed Income at Lannebo Kapitalforvaltning said in emailed comments. “Private consumption, supported by previous and expected rate cuts in the months ahead, will get a significant boost in the second half of next year.”
The half-point cut increases the rate gap between the Swedish central bank and its larger peer in the neighboring euro area. The European Central Bank hasn’t so far contemplated quickening its current pace of quarter-point increments.
Thedeen and his colleagues have been emboldened to chart their own policy path because of the considerable slowdown in price growth since early last year.
Just hours before the announcement, an initial estimate of price increases showed that the pace of inflation, according to the CPIF measure that the bank targets, picked up somewhat in October, to 1.5%. That was higher than economists’ expectations for 1.3% price growth.
Svenska Handelsbanken AB expects the Riksbank to continue cutting the benchmark rate in quarter-point increments at its next two meetings, bringing it to a neutral level of 2.25%.
“Overall, downside risks to demand dominate, but there are also factors that may boost global inflation, including tariffs,” Senior Economist Magnus Lindskog said in a note. “A continued weakening of the krona could also possibly make the Riksbank hesitate before going below neutral rate.”
The central bank also announced that it will continue selling government bonds amassed during the pandemic and the preceding period of low inflation, until its holdings amount to 20 billion kronor ($1.8 billion), down from 170 billion kronor currently. The sales are set to conclude by the end of 2025, it said.
--With assistance from Naomi Tajitsu, Gina Turner, Anton Wilen, Charles Daly, Christopher Jungstedt, Jonas Ekblom and Joel Rinneby.
(Updates with comments from Riksbank Governor and economists from fifth paragraph.)
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