Swedish Krona Sold on Surprise Rate Cut

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The Swedish Krona fell after the Riksbank cut Sweden's policy rate as it judged inflation is approaching target and the economy is weak.

The market was not fully expecting an interest rate cut at today's meeting, but the Riksbank cut rates 25 basis points to 3.75%.

Reflecting the surprise element, the Pound to Krona exchange rate is a quarter of a per cent higher on the day at 13.62 and the Euro to Krona is a third of a per cent higher at 11.72.

"Inflation is approaching the target while economic activity is weak. The Riksbank can therefore ease monetary policy," said the central bank in a statement.

It added that it was prepared to cut interest rates on two more occasions in 2024 "if the outlook for inflation still holds."

This is a forceful set of monetary policy guidance that can potentially keep SEK on the back foot. However, Charlotte Ong, European FX Strategist at HSBC, says this is "a hawkish hint" as it is more conservative than the market’s rate cut expectations prior to the meeting.

The Riksbank said there are risks that may cause inflation in Sweden to rise again are primarily linked to the strong U.S. economy, the geopolitical tension and the krona exchange rate. The adjustment of monetary "policy going forward should therefore be characterised by caution, with gradual cuts to the policy rate," it said.

Despite the conditionality, the outlook for SEK is soft, according to HSBC's strategists.

"The Riksbank’s balanced tone should not detract from the SEK-negative implications of this decision," says Ong. "The Riksbank’s rate cut today implies that the central bank is now prioritising growth/inflation dynamics more than preserving SEK resilience".

Andrew Kenningham, Chief Europe Economist at Capital Economics says the Riksbank is likely to follow today's 25bp rate cut with three more cuts this year as guidance shows the central bank warns that it now also sees downside risks to inflation, whereas previously it only saw upside risks.