.png)
The Swedish central bank (Riksbanken) announced a 25 basis point cut to the base interest rate, reducing it from 4% to 3.75% last Thursday. This move positions Sweden, along with Switzerland, as one of the first European economies to lower rates. Additionally, the bank indicated the possibility of two additional rate cuts in the second half of the year. This bold decision signals a new phase in Sweden's monetary policy aimed at accelerating economic recovery, contrasting with the more cautious approach of the U.S. Federal Reserve, which is expected to cut rates for the first time in its expansion cycle in either September or November. Notably, this marks the first time this century that Sweden has acted ahead of the U.S. on an interest rate change.
The announcement significantly boosted market sentiment, positively impacting both stock investments and the real estate market. Some of our real estate partners have responded favorably to the news, projecting significant growth for the remainder of the year.
Sweden’s inflation, measured by CPI (Consumer Price Index), fell to 3.9% in April, its lowest since January 2022, but still high due to the Riksbanken’s interest rate hikes which increased mortgage costs for Swedish households. The Riksbank had expected a higher rate of 4.4%, indicating the inflation continues to affect household finances significantly.
The CPIF, which excludes interest rates effects, rose slightly to 2,3%, below expectations due to temporary factors. The CPIF excluding Energy remained at 2,9%, where both analysts from major banks and Riksbanken expected a rise.
While most of the analysts and Swedish households are celebrating the return of the summer party, viewing the rate cut as a positive move, we at Carousel perceive it as a potential sign of desperation given Sweden’s economy is in recession.
Sweden's economic stagnation, rising unemployment, and modest wage growth are major concerns. The Riksbank, while aiming to meet its inflation target, must also ensure balanced production and employment development.
The depreciation of the Swedish krona adds to these concerns. Following the Riksbank's rate cut, the krona fell another 0.5% against the USD. Rate cuts typically weaken a currency by increasing the money supply relative to other currencies, making it less attractive for investment. Smaller currencies like the krona are especially vulnerable.
Riksbanken has admitted to limited understanding of how a weaker currency impacts Swedish inflation. The ECB is expected to follow Riksbanken with its own rate cut in the next policy decision. The summer party might continue if that actually occurs - otherwise, it might turn out to be an expensive one for the Swedish economy.
