On Wednesday, the Swedish central bank announced that it had cut its policy-setting interest rate by 0.25% to 3.75%. A day before, I commented that a rate cut, which I did not expect, would
raise the inevitable question of whether Sweden is on a fast track to euro membership. … the Riksbank has not yet built a credible policy room for lower rates
This question is even more valid now that they actually went ahead and cut their policy-setting rate. The Swedish Riksbank stands out in international comparison—and not to the advantage of the Swedes.
Only two notable European central banks have cut their interest rates recently. The first is the Magyar Nemzeti Bank, MNB, in Hungary. As I explained on Tuesday, the MNB was proactive in fighting inflation and getting the Hungarian economy on track to post-inflation strength. This allows the MNB to cut interest rates while the Hungarian economy is doing well. Hungary has a resilient economy with price stability and about half the unemployment rate that Sweden has.
The other rate-cutting central bank is the Swiss National Bank, SNB, which reduced its policy rate from 1.7% to 1.46% back in March. However, the Swiss central bank operates on completely different premises from the Swedish Riksbank: not only is the Swiss franc a global reserve currency, but their inflation problems were a breeze compared to what the Swedes are facing.
In short, it is impossible to credibly compare the Swiss and the Swedish central banks; the reasons that the former had for cutting their policy rate are completely inapplicable to Sweden. Likewise, the Hungarian rate cuts happened at a different phase of the business cycle; the Hungarians acted proactively while the Swedes are late to the game.
Other European central banks have decided to keep their interest rates unchanged. The Bank of England decided on May 9th to maintain its policy rate at 5.25%. Part of its reason was that British inflation “has fallen to its lowest level since September 2021, from a peak of 11% in 2022 to 3.2% in March [2024].”
It is worth noting that Swedish inflation, measured as the consumer price index (CPI) by Statistics Sweden, currently stands at 4.1%, more than twice the rate that the Riksbank wants to see before it officially begins to stimulate the economy again. Oddly, the Riksbank uses a different inflation measurement, called KPI-F, where changes in interest rates are ignored. Since the KPI-F currently stands at 2.2%, the Riksbank can tell itself that inflation is back down to perfectly manageable levels.
You don’t have to be an economist to see the absurdity in this. Just because a bunch of economists and statisticians at the central bank think they can ignore interest rates in calculating the cost of living, does not mean that the cost of living ignores interest rates.
For now, the Swedes can take relief in the fact that interest rates on their mortgages and credit cards may come down a smidge as a result of the Riksbank’s decision, but there is a significant risk that the rate cut will come back to haunt them in the form of higher import prices: a weaker Swedish currency makes. it more expensive for Swedes to import goods and services.
It is very likely that the Swedish currency will be weakened by this decision. One big reason is that other central banks chose to not cut their interest rates:
- The ECB was expected on April 11th to keep its rates unchanged, despite expectations earlier in the year that they would make at least one cut this spring;
- The Federal Reserve decided on April 30th to keep its federal funds rate unchanged, and is now expected by equal probability to raise its funds rate as it is to cut it;
- The Danish National Bank has maintained its lead policy rate at 3.6% since September last year;
- Norway’s central bank raised its policy rate to 4.5% back in December and has made no changes since then;
- On May 9th, the National Bank of Poland announced that it made no changes to its interest rates at its most recent policy meeting.
Why are the Swedes taking the lead in cutting interest rates?
One reason, again, could be that the Riksbank wants to bring some alleviation to homeowners with high-rate mortgages. This effect, which will materialize in the coming months, will be marginal to individual mortgage customers, but it will nevertheless be some relief. A reason to bring such relief would be that the Swedish banking system is having problems with overexposure to mortgage loans—a not uncommon problem for banks generally—and that the absence of some interest rate relief might set mortgage defaults in motion.
If this is the rationale behind the Swedish rate cut, then the Riksbank should have been more outspoken about it. It would mean that the nation’s banking system has no meaningful margins between continuing operations ‘as usual’ and bank insolvency.
Let me point out that I have no first-hand information on bank solvency issues in Sweden. I am merely conjecturing based on the most common effects of interest rate cuts of this kind—and the fact that the Riksbank goes against the trend in comparable countries as well as the policy leaders in Frankfurt and Washington.
There is one more possibility. Knowing full well that the rate cut would weaken the Swedish krona vs. other currencies, the Riksbank may have gone ahead and cut the rate for precisely this reason. It may sound conspiratorial—and analyzing monetary policy is almost by definition like analyzing conspiracies—but if the Swedish political and economic elite has decided that it would be better for Sweden to join the euro, then they are going to make sure that Sweden joins the euro.
Sweden has a peculiar history of government making pivotal decisions for the nation under some form of economic or financial duress. If my hypothesis is correct, namely that the Riksbank wants to help weaken the Swedish currency to the point where euro membership becomes inevitable, then we can expect the outbreak of some kind of economic or financial crisis in the coming 6-18 months. The government will point to the crisis and say that only a formal application for euro zone accession can alleviate the crisis pain.
I hope I am wrong, but my long experience with Swedish politics suggests otherwise.
