Sweden’s Central Bank Cuts Key Rate and Sees Two or Three More Cuts This Year

Sweden’s central bank cut its key interest rate for the second time this year and indicated it is likely to lower borrowing costs again as a faltering economy threatens to push inflation further below its target.

The Riksbank cut its key rate to 3.5% from 3.75%, in line with a poll of economists conducted by The Wall Street Journal ahead of the decision.

“If the inflation outlook remains the same, the policy rate can be cut two or three more times this year, which is somewhat faster than the Executive Board assessed in June,” the Riksbank said.

At its last meeting in June, the central bank suggested it could cut the policy rate two or three times during the second half of the year as long as the outlook for inflation holds.

After peaking at over 10% at the end of 2022, the pace of inflation in Sweden has slowed sharply, with the bank’s target measure dropping below the 2% target in both June and July. At the same time, the economy contracted by 0.8% in the three months through June, while household consumption remains weak and the labor market continues to deteriorate.

In its statement Tuesday, the Riksbank said inflation is now stabilising close to the target and the risk of inflation becoming too high again has declined significantly. At the same time, it said wage increases are moderate, while the growth outlook in Sweden and abroad is somewhat weaker than expected.

“The overall picture of the economy is worrisome and warrants more easing,” says Bartosz Sawicki, market analyst at Conotoxia. “Consumption remains in the doldrums, and GDP growth is set to account for about 0.5% year-on-year in 2024.”

Policymakers have been especially concerned about lowering borrowing costs too quickly over concerns that it would weaken the Swedish currency further and contribute to a bounce in inflation, but those risks are also dissipating as interest rates have declined abroad, easing depreciatory pressure on the krona.

Conotoxia expects the krona will continue to recover in the remainder of the year on the back of improving global risk sentiment. “Hefty market pricing of looming rate cuts should limit the downside for the currency,” Sawicki says.

The European Central Bank began its easing cycle in June, and although it took a wait-and-see approach at its most recent meeting, it kept the door open for further rate cuts this year.

In the U.S., the Federal Reserve has so far held off making its first move and last month held interest rates steady in a range between 5.25% and 5.5% for an eighth consecutive meeting.

However, weaker-than-forecast U.S. non farm payroll data earlier this month sparked recession concerns and prompted markets to ramp up bets for interest rate cuts. These rate cut expectations have since been trimmed following stronger data, but a September cut is largely expected by markets and Fed Chair Jerome Powell ’s speech at the Jackson Hole Symposium on Friday will be closely watched for clues.

Former New Hampshire Gov. Chris Sununu delivered a warning to Treasury Secretary Scott Bessent during a recent visit to Washington: Already-high airfares will surge if the war in Iran doesn’t end soon.

Sununu, a Republican who represents some of the biggest airlines as president of the industry group Airlines for America, has for weeks sounded the alarm to Trump administration officials about the economic fallout from high jet fuel prices. The war, Sununu has argued, must come to a close soon, or things will get worse.

Administration officials have gotten the message.

Privately, President Trump’s advisers are increasingly worried that Republicans will pay a political price for the rising fuel costs, according to people familiar with the matter. Many of those advisers are eager to end the war, hoping prices will begin to moderate before November’s midterm elections.

The fallout from the U.S.-Israeli attack in late February has slowed traffic through the Strait of Hormuz, a vital shipping lane, triggering a sharp increase in oil, gasoline and jet-fuel prices.

That means consumers are grappling with high costs ahead of the summer travel season, as they consider vacation plans.

Sixty-three per cent of Americans said they put a great deal or a good amount of blame on Trump for the increase in gas prices, according to a new poll conducted by NPR, PBS and Marist.

More than 8 in 10 Americans said struggles at the gas pump are putting strain on their finances.

Jet-fuel prices roughly doubled in a matter of weeks after the war began, and they have remained high. Airlines have said that will add billions of dollars of additional expenses this year, squeezing profit margins.

U.S. airlines spent more than $5 billion on fuel in March—up 30% from a year earlier, according to government data.

Carriers have been raising ticket prices, hoping to pass the cost along to consumers, and they are culling flights that will no longer make money at higher price levels.

In March, the price of a U.S. domestic round-trip economy ticket rose 21% from a year earlier to $570, according to Airlines Reporting Corp., which tracks travel-agency sales.

So far, airlines have said the higher fares haven’t deterred bookings and they are hoping to recoup more of the fuel-cost increases as the year goes on.

Earlier this week, Trump said the current price of oil is “a very small price to pay for getting rid of a nuclear weapon from people that are really mentally deranged.”

Secretary of State Marco Rubio told reporters that if Iran got a nuclear weapon, the country would have more leverage to keep the strait closed and “make our gas prices like $9 a gallon or $8 a gallon.”

Trump has taken steps in recent days to bring the war to an end. Late Tuesday, the president paused a plan to help guide trapped commercial ships out of the Strait of Hormuz, expressing optimism that a deal could be reached with Iran to end the conflict.

Crude oil prices fell below $100 a barrel on Wednesday, after reports that Iran and the U.S. are working with mediators on a one-page framework to restart negotiations aimed at ending the conflict and opening the strait.

Sununu said Trump administration officials are conscious of the economic fallout from the war: “They get it…and I think that’s why they’re trying to get through the war as fast as they can.”

But he cautioned that it could take months for prices to return to prewar levels.

“Ticket prices won’t go down immediately” after the strait is fully reopened, Sununu said. “You’re looking at elevated ticket prices through the summer and fall because it takes a while for the prices to go down.”

Since the initial U.S.-Israeli attack in late February, Sununu has met in Washington with National Economic Council Director Kevin Hassett, representatives from the Transportation Department and senior White House officials.

A White House official confirmed that Hassett and Sununu have discussed the effect of increased fuel prices on the airline industry. The official said the conversation touched on how the industry can mitigate the impact of high jet fuel prices on consumers.

“The president and his entire energy team anticipated these short-term disruptions to the global energy markets from Operation Epic Fury and had a plan prepared to mitigate these disruptions,” White House spokeswoman Taylor Rogers said, pointing to the administration’s decision to waive a century-old shipping law in a bid to lower the cost of moving oil.

Rogers said the administration is working with industry representatives to “address their concerns, explore potential actions, and inform the president’s policy decisions.”

A Treasury Department spokesman pointed to Bessent’s recent comments on Fox News that the U.S. economy remains strong despite price increases. The spokesman said Treasury officials have met with airline executives, who have reaffirmed strong ticket bookings.

“We’re cognizant that this short-term move up in prices is affecting the American people, but I am also confident, on the other side of this, prices will come down very quickly,” Bessent told Fox News on Monday.

The war has already contributed to one casualty in the industry: Spirit Airlines. Company representatives have said they were forced to close the airline because the sustained surge in jet-fuel prices derailed the company’s plan to emerge from chapter 11 bankruptcy.

The Trump administration and Spirit failed to come to an agreement for the company to receive a financial lifeline of as much as $500 million from the federal government.

Transportation Secretary Sean Duffy has argued that the Iran war wasn’t the cause of Spirit’s demise, pointing to the company’s past financial struggles, as well as the Biden administration’s decision to challenge a merger with JetBlue.

Other budget airlines have also turned to the federal government for help since the U.S.-Israeli attack. A group of budget airlines last month sought $2.5 billion in financial assistance to offset higher fuel costs, and they separately wrote to lawmakers asking for relief from certain ticket taxes.

Sweden’s Central Bank Cuts Key Rate and Sees Two or Three More Cuts This Year

The Riksbank cut its key rate to 3.5% from 3.75%

Administration officials have spoken to the airline industry, which has voiced concerns about the rising costs.