Riksbank Cuts Swedish Rate, Signals End to Easing for Now

The Riksbank, Sweden's central bank, has cut its key policy rate by 0.25 percentage points to 2.25%, signaling an end to its easing cycle for the time being. The decision, announced on 29 January 2025, reflects the bank's assessment that the risk of inflation becoming too high is limited, while economic activity remains weak. This article explores the reasons behind the rate cut, its potential impacts, and the factors contributing to the Riksbank's cautious approach.



Why the rate cut?

The Riksbank's decision to cut the policy rate was driven by several factors:

1. Limited inflation risk: Inflationary pressures have been deemed consistent with an inflation rate of around 2% for some time. The Riksbank has also noted that monetary policy and fading supply shocks have contributed to the fall in inflation, with CPIF inflation at 1.1% year-on-year in September 2024.
2. Weak economic activity: Although there are signs of a rebound, economic activity remains weak. The Riksbank has acknowledged that a stronger economy is important in its own right and is a necessary condition for inflation to stabilize close to the target.
3. Positive impact of previous cuts: Last year's interest rate cuts have had a positive impact on households' and companies' finances. However, their full impact on interest expenses and demand in the economy has yet to be felt.

Potential impacts of the rate cut

The Riksbank's rate cut is expected to have both short-term and long-term impacts on the Swedish economy:

1. Household finances: Lower interest rates reduce the cost of borrowing for households, improving their finances. This is particularly relevant for Sweden, where households are vulnerable to interest rate changes.
2. Consumption: With improved household finances, consumption is expected to grow faster than normal from the summer. This turnaround in the Swedish economy requires households to use part of the future improvements in their finances on consumption.
3. Housing market: Lower interest rates boost the housing market by making mortgages cheaper. The housing market has already shown signs of rebounding, with transactions, confidence, and prices improving.
4. Economic growth: A lower policy rate stimulates economic activity by making borrowing cheaper for businesses, encouraging investment, and supporting consumption. The Riksbank expects a recovery in demand this year, although it's still early days.
5. Inflation: Lower interest rates can help stabilize inflation close to the Riksbank's target of 2% by supporting economic growth.
6. Unemployment: By stimulating economic growth, lower interest rates can help reduce unemployment. Although unemployment remains relatively high, it is no longer rising.

Factors contributing to the Riksbank's cautious approach

The Riksbank's forward-looking monetary policy approach is guided by a tentative approach, which means it carefully evaluates the need for future interest rate adjustments based on the effects of earlier cuts and other information relevant to the outlook for inflation and economic activity. This cautious approach is reflected in the bank's acknowledgment of several factors that could affect economic developments and the policy rate going forward, such as developments abroad, geopolitical tensions, and the recovery in the Swedish economy and the krona exchange rate.

In conclusion, the Riksbank's decision to cut the policy rate by 0.25 percentage points to 2.25% is expected to improve household finances, boost consumption and the housing market in the short term, and support economic growth, stabilize inflation, and potentially reduce unemployment in the long term. However, the Riksbank remains cautious and prepared to act if the outlook for inflation and economic activity changes.