(Bloomberg) -- Sweden’s Riksbank lowered its benchmark interest rate by 25 basis points and signaled its easing campaign is likely to be wrapping up with one cut left to deploy.
The central bank in Stockholm cut the key rate to a two-year low of 2.5%, according to a statement on Thursday. Just one in 18 economists surveyed by Bloomberg expected unchanged borrowing costs, with all others predicting the move lower.
“If the outlook remains unchanged, the policy rate may be cut once again during the first half of 2025,” officials said, adding they will “carefully evaluate the need for future interest rate adjustments.”
The Swedish krona rose around 0.4% after the decision to trade at 11.48 per euro. The currency has fallen roughly 3% this year, pressured by a weakening economy.
Thursday’s reduction, the fifth in the Riksbank’s easing campaign intended to restart growth, followed a half-point cut last month.
Having brought inflation under control, the Riksbank has turned its gaze on the Swedish economy, a laggard for three years. Output has yet to recover even as interest rates have abated from levels that had previously been seen before the financial crisis and some board members have expressed concerns inflation might even cement itself at too-low levels.
“All in all, today’s message from the Riksbank was more hawkish than expected,” Nordea Bank Abp’s chief analyst Torbjorn Isaksson said in a note to clients. “The bank is less concerned about the economy and the labor market, but sees more risks for the inflation outlook.”
He’s among analysts forecasting two cuts, as is Lars Kristian Feste, head of fixed income at Lannebo Kapitalforvaltning. Feste continues to expect reductions in both January and March to give “a real boost to growth” in the second half.
What Bloomberg Economics Says...
“The Riksbank Executive Board’s rate cut in the final meeting of the year is not the news of the day — a signal that there’s only one more coming in 1H25, is the main revelation. With the economy failing to recover, our view remains that the Riksbank will be forced to cut twice in early 2025, taking the policy rate to 2%. Clearly, though, the risks to that view have shifted toward less easing.”
—Selva Bahar Baziki, Sweden economist. Read more here.
Speaking to reporters at a news conference, Governor Erik Thedeen stated his case for taking a breather to study the impact of cuts already enacted.
“If things are unclear, we would rather wait than to act as we know effects from monetary policy lags,” he said. “We have accelerated rate cuts in the end of this year and we think it is reasonable to wait and see what effects that might have had — and those might not be visible in January already.”
The Swedish economy is very rate-sensitive, as many households hold mortgages fixed on short terms, meaning reductions in borrowing costs are transmitted to the real economy at a fast pace. The two-year tightening campaign that started in 2022 saw interest rates reach as high as 4% in 2023, significantly denting both consumer and industry confidence.
At the other side of the Riksbank’s scale is the weakness of the Swedish krona, which sits near record lows versus both the US dollar and the euro. Its continued weakness may risk fueling inflation in the import and export-dependent economy, the largest in the Nordic region.
The Riksbank move comes amid a slew of other central bank rate decisions, with both the US Federal Reserve and European Central Bank opting to continue their rate-cut campaigns. Still, the Fed signaled a more cautious pace of easing next year after lowering its key rate for a third straight time on Wednesday.
“It’s easy to see our decision and the Fed’s decision as similar — some have described the Fed as a ‘hawkish cut’ and that the same might be true for Sweden,” Thedeen said. But what sets them apart is faster growth in the US, he said, concluding that “there’s a pretty significant difference between the two.”
Officials in neighboring Norway on Thursday guided for a first cut in March in a decision to keep their benchmark rate at 4.5%, the highest in 16 years.
Board members at the Swedish central bank have expressed concerns over economic prospects after the November election of Donald Trump to serve his second term as US president, particularly upside risks to inflation due to his proposed economic policies — including large tariffs on imported goods from much of the world.
Still, Thedeen has repeatedly said he believes Swedish inflation gives the bank room to act on previous pledges to continue to reduce borrowing costs. Increased confidence in the bank’s rate-path outlook has also been a key goal for Thedeen.
Going forward, stimulating the Swedish economy is a key target for both the Riksbank and the country’s center-right government, which for its first two years in power held off on tax cuts and spending to rein in inflation. In 2025, several taxes will be lowered and higher government spending is set to kick in, supporting an expected recovery as both consumers and businesses are likely to start spending more freely.
Still, on Wednesday, the Finance Ministry lowered its forecast for the pace of an economic rebound through 2026, citing a protracted weakness in Sweden and increased global uncertainty.
--With assistance from Joel Rinneby, Charles Daly, Christopher Jungstedt, Ott Ummelas, Alastair Reed, Christian Wienberg, Sara Sjolin and Naomi Tajitsu.
(Updates with governor’s comments from ninth paragraph)
©2024 Bloomberg L.P.