After eight rate hikes in Sweden, inflation is now close to the Riksbank’s 2% target after peaking at over 10%.

Sweden’s central bank cut its key interest rate to 3.75 per cent from 4.00 per cent on Wednesday (May 8) as expected, and said it was likely to cut the rate two more times in the second half of the year if the outlook for inflation still holds.

After two-year hiking cycle, global central banks around the world are weighing up when to start easing policy.

After eight rate hikes in Sweden, inflation is now close to the Riksbank’s 2 per cent target after peaking at over 10 per cent.

“Inflation is approaching the target while economic activity is weak,” the central bank said in a statement. “The Riksbank can therefore ease monetary policy.”

The overwhelming majority of analysts in a Reuters poll had forecast a quarter point cut, its first in eight years.

Rate-setters, however, are worried that rate cuts could further undermine the Swedish kronor and add to inflationary pressures, especially if the Riksbank gets out of synch with the European Central Bank and the US Federal Reserve.

“The adjustment of monetary policy going forward should therefore be characterised by caution, with gradual cuts to the policy rate,” the Riksbank said.

The ECB is expected to cut in June, but easier policy from the Fed may have to wait. Like several other central banks it is worried about inflation proving sticky.

The krona is currently trading at around the same level against the euro as during the global financial crisis in 2008-2009, and further weakness would push up import prices.

On the other hand, growth in large parts of the economy has ground to a halt and many households are struggling with mortgage payments at their highest level for more than 15 years.

Sweden’s economy shrank 0.2 per cent in 2023 and remained weak during the first three months of the year.

The last time the policy rate was lowered was in early 2016 when it fell to -0.50 percent, its lowest ever level.