Quick Bites | Sweden Cuts Rates

If there is one factor driving investment markets at present, it is the belief that inflation is on the way down, allowing central banks to reduce official interest rates. All eyes are focused on developed country central banks to see what path they are taking, and every time another central bank reduces rates, it consolidates the market’s expectations that the US Fed will probably reduce rates as well come 18 September. 

The latest example occurred last Tuesday 20 August: Sweden’s Riksbank cut its key interest rate from 3.75% to 3.50%, the second time borrowing costs have been lowered this year. Policy makers added that they are considering as many as three more reductions in 2024, provided that price pressures remain under control.

Source: BCA Research

The cut was widely expected. The Riksbank had kept rates on hold in June, after having led many other major central banks in easing policy in May. The inflation backdrop warrants easing policy. Sweden’s inflation continues to trend lower, reaching 1.3% y/y in June. Inflation expectations and wage growth also continue to decelerate.

Why is Sweden important?

Sweden is a small export-oriented economy which is highly sensitive to global growth developments. Recent indicators suggest global trade lacks a clear upward direction; lacklustre external conditions are a headwind to Sweden’s economy. Sweden’s Q2 GDP unexpectedly contracted 0.8% q/q. Moreover, Sweden’s manufacturing PMIs disappointed in July, plummeting from 53 to 49.2. The forward-looking new-orders-to-inventories measure turned negative.

Sweden’s economic performance warrants further easing. Because Sweden is a global growth bellwether, we can view its economic performance as a sign of further deterioration in global growth conditions. This is a factor that needs monitoring. Yet while rate cuts are certainly welcome, a major slowing down in the global economy is not. This is the needle that central banks have to thread: reduce rates once inflation is coming down, but don’t wait too long or the soft landing might get a little rough.