The Riksbank, Sweden’s central bank, became the latest European central bank to cut rates, announcing on Wednesday it was slashing its main interest rate by 0.25%. This is the first time the Riksbank has cut rates in eight years, and it is the first time that it has cut rates ahead of moves in a similar direction by the US Federal Reserve.
Sweden still has its own currency and is not part of the Eurozone, The Riksbank said that although economic activity is weak, inflation in Sweden has been dropping towards the target.
The Riksbank may be reacting to poor economic conditions in Sweden which have hit house prices and also seen a decline in domestic consumption. But inflation is falling too, and could hit the Riksbank target rate of 2% this year. The Swedish central bank is treading cautiously though, saying that another cut this year was unlikely.
Why does this interest rate cut matter?
Economists and FX traders have been razor-focused on the Fed, and the consensus is now that the Fed may avoid cutting rates for the rest of the year. Many investors had hoped to see the Bank of England cut rates this week, but fear that it will avoid doing so with the Fed still holding rates.
What is surprising is that several other European countries outside the Euro bloc are now cutting interest rates, including Switzerland, the Czech Republic and Hungary. Euro watchers say this trend is starting to tee up a cut from the European Central Bank.
“Data elsewhere suggests that cuts are coming much sooner, and likely to a much greater degree,” said FX analyst Michael Brown at Pepperstone. “The SNB, for instance, have already kicked off their own easing cycle, having delivered a 25bp cut in March, with Swiss inflation having reached the bottom of the target band.”
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This time things look a bit different
Traditionally, the Federal Reserve has led the way when it comes to cutting interest rates, but this time things look a bit different.
Sweden’s currency slid against the USD on the news. It is expected that the cut will put the krona under yet more pressure over the next few months.
European inflation and growth have been tracking weaker in recent months than the numbers the US has been putting out. The European Central Bank has said it is likely that it will start cutting rates itself when it holds its next policy meeting in June.
In 2019 the Riksbank quit the negative interest rate environment ahead of the ECB. Some economists feel the krona – and the Swedish economy more generally – is more closely aligned to the Eurozone than, say, the Swiss franc. This means Riksbank policy is being viewed as something of a bellwether for the Euro.
If European economies begin cutting rates faster than the US, it could cause a depreciation spiral, which has the potential to affect import prices and create higher inflation.
“The BoE also seem likely to deliver the first cut of the cycle early in the summer, with joblessness in the UK now standing at a 6-month high, and inflation set to kiss the 2% target during the spring,” Pepperstone’s Brown said. “While the antipodean central banks – the RBA & RBNZ – are likely to wait until August to follow suit, risks here are also skewed in a dovish direction.”
