Sweden dropped its prime interest rate from 4.00% to 3.75% on May 8. Whether it happens again in 2024 or not depends to a great extent on the external environment.
Sweden’s central bank, the Riksbank, cut its prime interest rate from 4.00% to 3.75% on May 8. This is the first interest rate cut by the Riksbank since 2016. The move comes as Sweden’s inflation rate dropped to 2.2% in March, and is trending toward the 2.0% mark desired by the central bank, if not below.
While foreign sources such as Reuters are more upbeat about the possibility of further cuts during the year, Sweden’s Dagens Nyheter (DN) is warier of possible external effects upon the Swedish economy. DN points out that the drop puts the Riksbank out of sync with the Treasury Department and European Central Bank. Further cuts, unless joined by others, will not only widen the gap, but will strengthen the discord.
Domestically, the country is still picking up the pieces after inflation hit 10% in 2022 with energy prices in particular rising. Inflation stayed high through the first half of 2023 with food prices remaining stubbornly high.
Sweden’s retail grocery market is mostly covered by three companies; ICA, which holds an over 50% market share, Axfood, which owns the Hemköp and Handlar’n chains, and Coop. According to Reuters given the oligarchic nature of the industry, the government was able to call the large players in and discuss temporary price reductions on some products.
The problem is the rest of the world
As DN put it, “these are the purely domestic factors. The problem is the rest of the world, and what forms our economic bridge to the rest of the world: the krona exchange rate.” For one thing, the way the Swedish economy and the American economy are ordered is different. Sweden’s economy is much less expansive in nature than that of the U.S.; it is much more sensitive to rate cuts and exchange rate fluctuations than the Americans’.
The Riksbank claims that two more rate drops are possible in 2024. However, if this is not matched by the Americans, the resulting currency mismatch could be impossible to reconcile without the krona devaluating again and the gains made by the current drop wiped out.
As DN points out, the Riksbank does run in line with the ECB. However, all eyes currently seem to be looking toward Washington.
