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Sweden’s central bank will announce whether it will start cutting interest rates in an early test of whether European monetary policymakers are prepared to diverge from the US even if it puts their currencies under pressure.
Two-thirds of economists polled by Bloomberg expect the Riksbank to cut interest rates by 0.25 percentage points from 4 per cent at its Wednesday meeting, its first reduction in more than eight years. Markets indicate an 80 per cent chance of a cut, a move that would provide support for Sweden’s stuttering economy.
“I do expect them to cut,” said Christina Nyman, chief economist at Handelsbanken and a former Riksbank official, citing differences in the US and Swedish economies. “It’s the currency that could be potentially be a problem. Sweden is a small open economy and we are dependent on what happens around us,” she added.
A rate cut by the Riksbank, following similar moves in the past few months by the Swiss, Czech and Hungarian central banks, would show Europe’s growing willingness to take a different path from the US on monetary policy, economists say.
An expected cut by the European Central Bank at its next meeting would confirm that divergence. Due to the size of the US economy and the outsized influence of its financial markets and the dollar, the Federal Reserve usually leads the way on changing rates.
With US inflation remaining higher than expected and its economy continuing to produce solid growth, the Fed last week signalled it was likely to keep rates higher for longer.
However, inflation and growth in Europe have been weaker in recent months than in the US, opening the door for the region’s central banks to start lowering borrowing costs before the Fed.
The ECB has signalled it is likely to start cutting rates at its next policy meeting on June 6 if price pressures keep fading as expected. The Riksbank has moved ahead of the ECB before: in 2019 it ditched negative interest rates more than two years before they ended in the Eurozone.
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 shifts in the euro and ECB monetary policy decisions.
But there are worries that if rates in Europe fall faster than in the US, it would cause European currencies to depreciate against the dollar, raising import prices and fuelling higher inflation. Riksbank governor Erik Thedéen recently acknowledged that the krona could be affected if the Fed sustains higher rates.
“The Riksbank is particularly interesting to watch in this episode as the structure of the Swedish economy is closely related to the wider European one and hence it acts more as a precursor [than Switzerland] for what may come from the ECB,” said Piet Haines Christiansen, a strategist at Danske Bank.
The Riksbank indicated in March that it was likely to cut rates at its May or June meetings. Sweden’s economy contracted last year and in the first quarter after a series of rate rises led to a sharp drop in house prices and fall in consumption, while there are signs that inflation should reach the Riksbank’s 2 per cent target this year, leading several economists to forecast a cut this week.
Nyman said the Riksbank was likely to have “an early start, but take it slowly”, perhaps making two more rate cuts by year-end.
Andrew Kenningham, an economist at consultants Capital Economics, added: “The krona is still stronger than it was last September and we doubt that the recent depreciation will be enough to dissuade policymakers from cutting rates.”
Support for a Swedish cut stands in contrast with sentiment in neighbouring Norway, which is also suffering from a weak currency. Norges Bank last week indicated it would keep rates on hold for the foreseeable future, with some economists now expecting it not to cut until December or even next year. That would probably make it one of the last major central banks to start loosening.
