The Bank of Sweden cut interest rates for the first time in eight years, lowering the benchmark interest rate by 25 basis points to 3.75%, making it the second developed economy to cut interest rates. Previously, the SNB took the lead in cutting interest rates.

The Bank of Sweden said that inflation is returning to target and economic activity is weak, so monetary policy can be relaxed. If the inflation outlook remains unchanged, it is planned to cut interest rates twice more in the second half of the year.

The Swedish economy contracted last year and the first quarter of this year. Previously, a series of interest rate hikes led to a sharp drop in housing prices and a drop in consumption. At the same time, there are signs that inflation should reach the 2% target set by the Riksbank in 2024.

Economists say that following similar measures taken by the central banks of Switzerland, the Czech Republic and Hungary in the past few months, Sweden's interest rate cuts indicate that Europe is increasingly willing to follow a different path from the US in terms of monetary policy.

Christina Nyman, chief economist at Commerzbank and a former Riksbank official, said earlier that interest rate cuts may put further pressure on the already weak Swedish krona, especially if the Federal Reserve delays interest rate cuts.

“What could be a potential problem is currency. Sweden is a small, open economy, and we depend on what's happening around us.” she added.

As an EU member state, more than two-thirds of Sweden's imports and more than half of its exports trade with the EU, which makes the Nordic economy very sensitive to changes in the euro and the ECB's monetary policy decisions.

However, there are concerns that if interest rates in Europe fall faster than in the US, it will cause the European currency to depreciate against the US dollar, thereby increasing import prices and increasing inflation. Bank of Sweden Governor Eric Seddon recently acknowledged that if the Federal Reserve maintains higher interest rates, the krone may be affected.

Bank of Denmark strategist Piet Haines Christiansen said: “The Riksbank is particularly noteworthy in this incident because the structure of the Swedish economy is closely linked to the broader European economic structure, so it (more than Switzerland) is a pioneer of possible action by the ECB.”

TD Securities analysts expect the US dollar to strengthen against other G10 currencies as interest rate differences continue to be beneficial to the US dollar. They said, “We are optimistic about the US dollar against the Group of 10 (G-10) currencies. The central banks of these countries may soon start cutting interest rates.”

Additionally, TD Securities expects the Bank of England to keep interest rates unchanged at 5.25% on Thursday, but is expected to cut interest rates for the first time in June.

Sweden's interest rate cut is in stark contrast to neighboring Norway, which is also affected by currency weakness. The Bank of Norway said last week that it will keep interest rates unchanged for the foreseeable future. Some economists currently expect the bank to cut interest rates until December or even next year. This could make it one of the last major central banks to begin easing monetary policy.