For the first time in eight years, Sweden’s central bank, known as Riksbank, has decided to lower interest rates. This move comes as European monetary policymakers choose to bolster their economies, in contrast to the United States, even if it causes some currency depreciation.
On Wednesday, Riksbank decreased its main interest rate by 0.25 percentage points to 3.75 per cent, marking the first instance this century where the Swedish central bank has loosened monetary policies ahead of the US Federal Reserve. Erik Thedéen, the governor of Riksbank, calmly spoke with the Financial Times, noting a robust decrease in inflation that he believes to be stable.
However, Thedéen expressed concern about several potential hazards, some of them being increased inflation due to a declining Swedish krona, geopolitical risks, and the enduring prowess of the US economy.
This recent step taken by Riksbank, along with the Swiss, Czech, and Hungarian central banks, indicates an emerging trend among European nations to stray from US monetary policy. Economists suggest that an upcoming rate cut from the European Central Bank would substantiate this diversion. Usually, owing to the size of the US economy and the significant impact of American financial markets and the dollar, the Federal Reserve has taken lead when it comes to adjusting rates.
Following this decision by Riksbank, the krona depreciated by 0.4 per cent against the dollar, falling to SKr10.90, and diminished by 0.3 per cent against the euro, falling to SKr11.71. This year, the Swedish currency is amongst the bottom three performers in the G10 group of heavily traded currencies, declining 7.5 per cent against the dollar and 5 per cent against the euro.
According to Christine Nyman, a former Riksbank official and current chief economist at Handelsbanken, a cut in the interest rates could exert more pressure on the krona, particularly if the Fed decides to postpone its own reductions. She emphasised the potential risks to a small open economy like Sweden’s which is vulnerable to global economic shifts.
Contrarily, the US continues to enjoy consistent economic growth and higher than predicted inflation. Last week, the Fed indicated its incline towards maintaining the high rates. In comparison, European countries are witnessing slower growth and inflation, which paves the way for central banks in the region to reduce borrowing costs before the Fed.
The European Central Bank (ECB) has indicated a high chance of a rate reduction at their forthcoming policy assembly on June 6, provided the anticipated decrease in cost pressures continues. – As reported by The Financial Times.