Swedish central bank cuts policy rate to support weak economy

STOCKHOLM (Reuters) -Sweden's central bank cut its key policy rate to 2.25% from 2.50% as expected on Wednesday to boost sluggish economic growth and said its forecast for interest rates held though it stood ready to act if the outlook for prices and activity changed.

The Riksbank has slashed rates over the last year nearly as fast as it hiked them when the global bout of inflation hit after the pandemic and Russia's invasion of Ukraine.

At its meeting in December, the Riksbank had said it expected to cut only once more in this cycle, sometime in the first half of this year, but rate-setters have been concerned about sluggish growth.

"Given that the risk of inflation becoming too high is limited, at the same time as economic activity is weak ... it is appropriate to cut the policy rate now," the Riksbank said in a statement.

Rate-setters said a stronger economy was needed to get inflation, which dipped to 1.5% in December, to stabilise around the 2% target.

"Since we believe macro data will be slightly weaker than the Riksbank forecast in the near-term, we stick to our forecast that the Riksbank will cut the policy rate in March by 25 basis points," Swedbank said in a note. Nordea said it expected another cut, but in May.

Capital Economics said it did not see another cut.

"The central scenario for the bank is that there is a strong recovery this year, driven by consumption. That scenario is consistent with no further policy easing," Europe Economist Adrian Prettejohn said.

After peaking at 4%, the central bank has now eased policy six times since the spring of 2024 as a result of its growing confidence that inflation, which topped 10% in late 2022, is under control.

Focus has now switched to the economy, which has barely grown in the last couple of years.

The Riksbank expects a pick-up this year, not least because of rate cuts, but the outlook is uncertain and rate-setters said they were prepared to act if the outlook changed.

"There is particular uncertainty regarding developments abroad, for instance with regard to economic policy in the United States and Europe and the geopolitical tensions," it said. "There are also risks linked to the recovery in the Swedish economy and the krona exchange rate."

The U.S. Federal Reserve will announce its decision on rates later on Wednesday.

(Reporting by Terje Solsvik, Anna Ringstrom, Niklas Pollard and Simon Johnson; Editing by Niklas Pollard)