Sweden’s central bank cut interest rates for the first time in eight years as European monetary policymakers diverge from the US to support their economies even if it comes at the expense of their currencies.
The Riksbank reduced its main interest rate by 0.25 percentage points to 3.75 per cent on Wednesday, the first time it has loosened policy ahead of the US Federal Reserve this century.
“We are convinced enough that inflation has come down, and has come down in a sustainable way,” Erik Thedéen, the Riksbank’s governor, told the Financial Times.
But he added that most of the risks were “on the upside” such as a further weakening of the Swedish krona leading to higher imported inflation, geopolitical risks and the continued strength of the US economy.
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The Swedish rate cut, following recent similar moves by the Swiss, Czech and Hungarian central banks, shows Europe’s growing willingness to take a different path from the US on monetary policy, economists say.
An expected cut by the European Central Bank at its next meeting would confirm that divergence. Due to the size of the US economy and the outsized influence of its financial markets and the dollar, the Federal Reserve usually leads the way on changing rates.
After the Riksbank’s decision the krona slid 0.4 per cent against the dollar to SKr10.90 and 0.3 per cent against the euro to SKr11.71.
Sweden’s currency is the third-worst performer in the G10 group of most traded currencies this year, down 7.5 per cent against the dollar and 5 per cent against the euro.
Christina Nyman, chief economist at Handelsbanken and a former Riksbank official, said earlier that a rate cut would put the krona under further pressure, particularly if the Fed delays its own cuts.
“It’s the currency that could potentially be a problem. Sweden is a small open economy and we are dependent on what happens around us,” she said.
With US inflation remaining higher than expected and its economy continuing to produce solid growth, the Fed last week signalled it was likely to keep rates higher for longer.
However, inflation and growth in Europe have been weaker in recent months than in the US, opening the door for the region’s central banks to start lowering borrowing costs before the Fed.
The ECB has signalled it is likely to start cutting rates at its next policy meeting on June 6 if price pressures keep fading as expected. – Copyright The Financial Times
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