Sweden cuts interest rates as Europe separates from the Fed

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Sweden’s central bank cut interest rates for the first time in eight years as European monetary policymakers disagreed with America supporting their economies even if it hurt their currencies. they have to pay the price.

The Riksbank cut its key interest rate by 0.25 percentage points to 3.75% on Wednesday, the first time it eased policy before the US Federal Reserve this century.

“When inflation approaches target while economic activity is weak, monetary policy can be loosened.” Riksbank speak. “If the inflation outlook remains intact, policy rates are expected to be cut two more times in the second half of the year.”

Economists say Sweden’s interest rate cut, which follows similar moves in the past few months by the Swiss, Czech and Hungarian central banks, shows Europe is increasingly willing to follow a different path from the US in terms of monetary policy.

The expected cut by the European Central Bank at its next meeting would confirm that difference. Because of the size of the U.S. economy and the outsized influence of financial markets and the dollar, the Federal Reserve often takes the lead in changing exchange rates.

After the Riksbank decision, the krona fell 0.5% against the dollar to SKr10.9 and 0.4% against the euro to SKr11.7.

The Swedish currency is the third most traded G10 currency this year, down 7.5% against the dollar and 5% against the euro.

Christina Nyman, chief economist at Handelsbanken and a former Riksbank official, earlier said a rate cut would put the krona under further pressure, especially if the Fed delays a rate cut.

“The currency itself can be a problem. Sweden is a small, open economy and we depend on what happens around us,” she added.

With US inflation remaining higher than expected and the economy continuing to grow solidly, the Fed signaled last week that it was likely to leave interest rates unchanged. higher for longer periods of time.

However, inflation and growth in Europe in recent months have been weaker than in the US, opening the door for regional central banks to start reducing borrowing costs ahead of the Fed.

ECB does signal is likely to begin cutting interest rates at the next policy meeting on June 6 if price pressures continue to ease as expected. The Riksbank has been ahead of the ECB before: in 2019 it scrapped negative interest rates more than two years before they ended in the Eurozone.

As an EU member state, more than two-thirds of Sweden’s imports and half of its exports are traded with the bloc, making the Nordic economy sensitive to changes in policy decisions. currencies of the euro and ECB.

But there are concerns that if interest rates in Europe fall faster than in the US, it would cause European currencies to lose value against the dollar, raising import prices and fueling higher inflation. Governor of the Riksbank Erik Thedeen recently acknowledged that the krona could suffer if the Fed maintains higher interest rates.

“The Riksbank is particularly interesting to watch in this episode because the structure of the Swedish economy is closely related to the wider European economy and so it acts more as a precursor. [than Switzerland] Piet Haines Christiansen, strategist at Danske Bank, said what could come from the ECB.

The Swedish economy contracted both last year and the first quarter of this year after a series of interest rate hikes led to sharp falls in house prices and falling consumption, while there are signs that inflationary will reach the Riksbank’s 2% target by 2024.

The Riksbank on Wednesday stressed that the inflation outlook is uncertain and that further changes in interest rates “should therefore be characterized by caution” as it is particularly concerned about the strong US economy , the krona and geopolitical tensions.

Sweden’s interest rate cuts contrast with sentiment in neighboring Norway, which is also suffering from a weak currency. Norges Bank said last week it would leave interest rates unchanged for the foreseeable future, and some economists now expect rates not to fall until December or even next year. That would likely make it one of the last major central banks to start easing.

Additional reporting by Mary McDougall in London