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The Central Bank is worried about inflation backlash

The Swedish Central Bank's board is aiming for further cuts in the interest rate, but warns against cutting too quickly. Inflation risks then turning upwards again. The krona is identified as a risk factor – in combination with a difficult-to-assess geopolitical situation, according to the minutes from the latest meeting.

» Updated: 16 July 2024, 14:14

» Published: 03 July 2024

The Central Bank is worried about inflation backlash
Photo: Claudio Bresciani/TT

The Swedish Central Bank's board is aiming for further cuts in the interest rate, but warns against cutting too quickly. Inflation risks then turning upwards again.

The krona is pointed out as a risk factor – in combination with a difficult-to-assess geopolitical situation, according to the protocol from the latest meeting.

"For the Swedish economy and inflation, it is important to follow the geopolitical development with an increasingly fragmented world and important elections in the coming months," said the first vice governor of the Swedish Central Bank, Anna Breman, at the June meeting, according to the protocol.

"A consequence can be increased protectionism and it tends to lead to higher inflation."

"Cautious approach"

Vice governor Aino Bunge emphasized that the interest rate cuts she wants to see should be gradual easing.

"Monetary policy also needs to be characterized by a cautious approach on the way to a neutral interest rate level, where we are prepared to adjust our plan if necessary," Bunge said at the meeting.

The Swedish Central Bank's board was unanimous in the decision to leave the interest rate unchanged at 3.75 percent at the June meeting, after having decided on the first cut in eight years in May.

"It's worth buying a relatively cheap insurance against a worse development by refraining from cutting the interest rate at today's meeting," said vice governor Per Jansson.

A new so-called interest rate path was attached to the decision, i.e. the Swedish Central Bank's forecast for the interest rate going forward, with two to three interest rate cuts during the second half of 2024 to 3.00-3.25 percent.

Can lower mortgage rates

In the previous interest rate path from the Swedish Central Bank, there were only two interest rate cuts during the corresponding period.

The Swedish Central Bank's interest rate – which has been raised to unusually high levels during the inflation and interest rate shocks of 2022-2023 – affects, among other things, variable mortgage rates and other interest rates in the Swedish economy.

If mortgage rates follow the interest rate down by 0.75 percentage points, the interest cost for a mortgage of three million kronor would decrease by 22,500 kronor per year or 1,875 kronor per month, if one disregards the effects of interest deductions.

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By TTThis article has been altered and translated by Sweden Herald

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