The Swedish central bank's first rate cut since 2016 leaves the SEK vulnerable

Sweden became the second developed economy to cut interest rates in 2024. The Riksbank followed the Swiss National Bank and cut its key interest rate from 4 to 3.75 pct. The policy rate is expected to be cut two more times in the second half of the year. Today's decision was expected, but not unanimous. Markets had priced in almost 70% of the possibility that the cycle would begin in May. The Swedish krona fell after the cut. The EUR/SEK jumped above 11.70, close to a six-month high.

At its previous meeting in March, the Riksbank had indicated that it would probably lower borrowing costs in the first half of the year. The overall macroeconomic picture called for action. Price pressures had fallen much faster than expected. The preferred measure of inflation, which is not affected by changes in mortgage rates, exceeded 10 ptc YoY in late 2022 and should fall below 2 pct in the last quarter of this year. GDP has been shrinking in QoQ terms for four consecutive quarters now, and the jobs market condition is deteriorating, with unemployment at a 3-year high of 8.6 pct.

Despite key domestic factors calling for an imminent easing, the Swedish central bankers still faced a tough choice. Officials could either push through with the first rate cut since 2016 to aid the struggling economy or postpone the cut until June to shelter the beleaguered currency. In year-to-date terms, the EUR/SEK exchange rate soared almost 5 pct. Among the G-10 currencies, only the Japanese yen and the Swiss franc proved more vulnerable to the resurgence of the US dollar than the Swedish krona. The continued weakness of the krona poses a clear inflation risk.

The cut ahead of the ECB and the Federal Reserve still means that the currency could remain fragile and come under renewed pressure unless the US economy loses momentum and disinflation resumes, allowing for more aggressive Fed rate cuts. Fintech Conotoxia FX forecasts that despite domestic vulnerabilities, the Swedish krona will gradually recover on the back of improving global sentiment and a pick-up in Eurozone economic activity. The EUR/SEK exchange rate is unlikely to fall below 11.0 as the year progresses.