Riksbank Delivers Third Interest Rate Cut to 1.75% to Bolster Economic Recovery

On September 23 (local time), Sweden's central bank, the Riksbank, announced a 25-basis-point cut to its policy rate, bringing it down to 1.75%. This marks the third interest rate cut by the Riksbank this year, with the current rate now hitting a three-year low.

The magnitude of this rate cut exceeded market expectations. Prior to the announcement, markets had predicted the rate would drop to 1.88%. Among 22 economists surveyed by institutions, only 9 forecasted a rate cut, while the remainder expected the rate to stay unchanged.

In its statement, the Riksbank noted that the global economy remains affected by geopolitical tensions and the resulting uncertainties for businesses and households, though the overall outlook for global growth has remained largely unchanged. Sweden’s inflation rate in August stayed elevated, but core inflation—excluding energy prices—edged down slightly and was in line with previous forecasts. The tax reduction measures announced by the government will temporarily ease inflation next year, but they are not expected to have a substantial impact on inflationary pressures.

The Riksbank pointed out that conditions for stronger economic activity still exist, and there have been recent signs of improvement. However, long-term economic growth has been weak, the timeline for the anticipated recovery has been repeatedly pushed back, and the recovery of the labor market appears to be taking longer than expected. To provide further support for economic recovery and stabilize inflation at the target level over the medium term, the Executive Board decided to lower the policy rate by 0.25 percentage points to 1.75%. If the outlook for inflation and economic activity remains unchanged, the policy rate is expected to stay at this level for some time to come.

Nevertheless, Anna Seim, Deputy Governor of the Riksbank, expressed reservations about the decision to cut the policy rate. She advocated for keeping the rate unchanged and suggested the possibility of a further cut later this year. In her view, a fragile supply side, combined with expansionary fiscal policies in 2026, means inflation could rise unexpectedly.

At the same time, the Riksbank revised down its GDP growth forecast for this year, from 1.2% to 0.9%. It also lowered its inflation forecast for 2026 from 1.7% to 1.0%, mainly due to the government’s announcement to halve the value-added tax (VAT) on food—a measure expected to reduce inflation by approximately 0.7 percentage points. Regarding the policy rate outlook, the Riksbank projected it would remain at 1.75% from the fourth quarter of 2025 to the third quarter of 2026, rise to 1.88% in the third quarter of 2027, and reach 2.04% in the third quarter of 2028.

Furthermore, to facilitate efficient transactions, the Riksbank decided to allow the holdings of Swedish government bonds to fluctuate between 18 billion and 22 billion Swedish kronor. It also adopted regulations governing transactions in Sweden’s securities portfolio and stated that, to further enhance operational capacity, the securities portfolio will be supplemented by repurchase agreements (repos and reverse repos) involving Swedish nominal government bonds.

Torbjörn Isaksson, Chief Analyst at Nordea Bank, commented that while there have been signs of recovery in the Swedish economy, the central bank still aims to provide additional impetus through this rate cut. He predicted that the Riksbank will not implement further rate cuts; instead, the next policy adjustment will likely be a rate hike, potentially occurring in the first half of 2027. However, he did not rule out the possibility of a rate hike as early as next year, which will depend on Sweden’s GDP growth performance. Isaksson emphasized, though, that it is still too early to make a clear forecast for the future rate-hiking path.

Since launching its rate-cutting cycle in May 2024, the Riksbank has cut interest rates eight times, lowering the policy rate from 4% to 1.75%. This latest cut comes against the backdrop of monetary policy adjustments by multiple central banks worldwide. The U.S. Federal Reserve also announced a rate cut last week, sparking market attention on the global trend of monetary policy easing.

The Riksbank’s decision to cut rates once again demonstrates its adoption of proactive monetary policy measures to address sluggish economic growth and inflation volatility, with the goal of supporting economic recovery and stabilizing inflation at the target level. However, due to uncertainties in the economic situation, the future direction of the Riksbank’s monetary policy remains to be seen.