Cautious Rate Cutting: Sweden's Economic Balancing Act

Sweden's central bank reduced its key interest rate to 2.50%, as anticipated, reflecting caution in further rate cuts expected in 2025. The rate drop follows years of high inflation control measures, with the Riksbank hinting at potential future cuts depending on economic conditions.

On Thursday, Sweden's central bank made a widely expected decision to lower its key interest rate by a quarter percentage point, bringing it down to 2.50%. The bank, however, expressed reservations about cutting rates further in early 2025.

Sweden's economy has been stagnant over the past two years after aggressive interest rate hikes were employed to combat soaring inflation, which reached around 10% in late 2022. With inflation now subdued, the central bank started lowering rates in May, yet both households and businesses remain cautious about spending.

According to a statement by the Riksbank, the rate could see another reduction during the first half of 2025 if inflation and economic growth prospects stay consistent. Following a larger-than-usual cut in November, rate-setters indicated they might reduce rates again in December and perhaps once or twice in early 2025. This careful approach arises from the fact that monetary policy influences the economy with a delay.

(With inputs from agencies.)