Yahoo Finance Riksbank Cuts Rate Again and Opens Door to Half-Point Move
(Bloomberg) -- Sweden’s Riksbank cut borrowing costs by a quarter point and raised the possibility of a bigger step in coming months in its bid to spur a listless economy.
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The central bank reduced its interest rate to 3.25%, and outlined additional easing that is likely to take the benchmark markedly lower by the end of 2024.
“The policy rate may also be cut at the two remaining monetary policy meetings this year” and “a cut of 0.5 percentage points is possible at one of these meetings,” the Riksbank said on Wednesday. “The policy rate is thus expected to be cut at a clearly faster pace than was previously communicated.”
The decision was expected by all 23 economists in a Bloomberg survey, although several saw an outside chance of a larger move — matching that of the US Federal Reserve last week — that officials have now aired as a possibility in future.
The possibility of a half-point rate cut triggered selling in the krona, which fell as much as 0.4% to 11.3313 per euro. The currency had been gaining since late July, hitting its highest versus the euro in nearly three months, on the view that the Riksbank may stick to smaller cuts this year.
Still, bringing borrowing costs a quarter point lower at each meeting remains the main scenario, Governor Erik Thedeen told reporters in Stockholm following the decision. Key for the central bank is a “gradual but rapid” process to normalize the rate, he said, adding that a half-point cut is consistent with such an approach.
“The job on inflation has been completed — and then some,” said Kyle Chapman, a foreign exchange strategist at Ballinger Group, who predicts the Riksbank will need to become even more aggressive in its response. “I see strong risks that we get two 50 basis-point rate cuts before the end of the year.”
Thedeen and his colleagues have been emboldened by the slowdown in price growth since early last year that’s giving them leeway to help one of the laggard economies of the region. In recent months, the measure of inflation that the central bank aims to keep around 2% has even fallen some way below that target.
What Bloomberg Economics Says...
“Sweden’s Riksbank maintained a dovish tilt at its September meeting, supporting our view that the 25 basis-point cut made today will be followed by a further 50 basis points of reductions this year. We see this materializing as equal sized steps in November and December — but the policy announcement flags a risk of a single jumbo cut at one of those meetings. Should inflation data surprise favorably, we see that risk scenario being fulfilled at the November gathering. However, clear language pointing to the risk of a 50 basis-point cut is a dovish shift that went further than we expected.”
—Selva Bahar Baziki, economist. Click here to read more.
With growth sluggish and unemployment rising, calls for rate cuts have mounted, and the Riksbank said its new guidance should help address those challenges.
“These changes imply a relatively large shift of monetary policy in a more expansionary direction, which will improve households’ finances and make it easier for companies to invest,” the central bank said.
Swedbank AB analysts said they now see a deeper 50 basis-point cut in November and a 25 basis-point cut in December, changing their call after the rate decision from two quarter-point moves expected previously.
Having seen Riksbank’s guidance, analysts at Nordea Bank Abp and SEB AB instead held on to their diverging forecasts, with the largest Nordic lender seeing three quarter-point cuts through January, to 2.5%. SEB expects a half-point cut in November and three more quarter-point cuts through the first quarter.
Sweden has avoided the most adverse economic scenarios, which painted it as the country in Europe that could be worst affected by inflation and rising rates.
Even so, the Nordic nation’s economy has been largely stagnant for almost three years. In the second quarter, output contracted by 0.3%, according to official data.
A recovery is expected to pick up pace toward the end of this year and into 2025, when it will be helped by tax cuts and increased spending that are part of an expansionary budget proposal announced earlier this month.
The Riksbank cut forecasts for its key CPIF inflation metric — a measure for consumer prices with a fixed interest rate — for this year and the next, expecting a bigger undershoot versus its target than previously. The economy will expand 0.8% this year, less than it had expected, but accelerate more than projected at 1.9% in 2025.
“These faster moves in the policy rate should feed into better spending power for consumers, and possibly unlock a faster pace of investment, lifting the Swedish economy from very weak growth into something much more favorable,” said James Pomeroy, global economist at HSBC Bank Plc. “As the Daft Punk song says, ‘Do it faster, makes us stronger’.”
--With assistance from Zoe Schneeweiss, Naomi Tajitsu, Joel Rinneby, Christopher Jungstedt, Anton Wilen, Jonas Ekblom, Alastair Reed and Stephen Treloar.
(Updates with governor comment from sixth, economist comments from ninth paragraph)
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