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Lower Rates In Sweden

Pressed to boost growth and still willing to put up with a far too weak Swedish krona, the Riksbank has become the 2nd major European central bank to lower its key interest rates.

By EC Invest

After the Swiss National Bank, the Swedish Riksbank has become the 2nd major European central bank to lower its key rates. The cut, to 3.75% (from 4.0%), is the first in eight years and, according to the Stockholm authorities, should be followed by two further reductions by the end of the year. This downward trend is not without risk. While Switzerland has to deal with very low inflation (only 1.4% in April), Sweden is facing tougher inflation.


True, the Riksbank's preferred measure of non-interest rate inflation fell to just 2.2% in March. But the main inflation index is still 4.1%, and in a country where households are as indebted as in Sweden (for the most part with variable rates or very short fixed-rate periods), the impact of debt charges on household purchasing power is far from negligible.

Finally, the reduction in yields offered by Sweden at a time when those offered in the eurozone and the United States remain high puts further pressure on an already fairly weakened Swedish krona, and risks further boosting inflation through the prices of imported products.

The Riksbank is therefore clearly focusing on economic recovery. It's true that the Swedish economy is one of the hardest hit by rising credit costs. It has been in recession for four quarters and, according to Eurostat, was the only European Union economy still in contraction in the 1st quarter of this year.

But this is not a risk-free choice, particularly for the local krona.

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