The Riksbank (Sweden's central bank) this Wednesday cut the reference interest rates in its economy, from 4% to 3.75%, for the first time in eight years, acting before the European Central Bank (ECB) in a attempt to offer a respite to families and companies in the Nordic country that are being hit by the recession.

Like the ECB itself, like the Bank of England or the United States Federal Reserve (Fed), the Riksbank began a cycle of monetary austerity in 2022 to fight the global inflation crisis due to the end of the pandemic and which exacerbated the Russian invasion of Ukraine. Sweden's central bank increased the official 'price' of money from 0% in April 2022 to 4% in September last year, a maximum not seen since 2008.

This classic (or orthodox) strategy of monetary policy attempts to combat price increases by suffocating the demand of families and companies – or what is the same: suffocating economic activity in general by increasing the cost of mortgages and loans and financing—, without taking into account that the origin of the inflation crisis was in the supply of energy and other raw materials. And, indeed, its consequences can be very aggressive, especially for the most vulnerable, while the banks earn more and more.

The Riksbank statement accompanying the interest rate cut acknowledged the damage its decisions have inflicted on the economy. “The labor market will continue to weaken for some time,” he says (read here). And he highlights that “inflation is now close to the target (2% year-on-year) and is expected to be maintained.”

In fact, a calendar is even set for further reductions in official interest rates. “If the inflation outlook remains the same, it could be cut twice more during the second half of the year.”

The Swedish bank is not the only continental neighbor of the ECB that points the way to the beginning of the end of monetary austerity. The Schweizerische Nationalbank (Swiss National Bank or SNB) carried out a first cut in the official 'price' of money in March, from 1.75% to 1.5%, after a surge that started in June 2022 from -0.75 %. “It is a brave measure to get ahead of the ECB and the Federal Reserve, although the SNB probably believes that the other central banks will also cut rates,” Alessandro Bee, UBS economist, assessed then in statements reported by 'Reuters'. The central bank of the Czech Republic did it much earlier, in December 2023. And that of Hungary, in October.

“Sweden usually gets ahead of what the ECB does later,” says Víctor Alvargonzález, founder of Nextep Finance. “The fact that the Riksbank has cut rates tells us that domestic economic concerns are beginning to dominate the monetary policy debate,” point out, for their part, James Smith and Francesco Pesole, experts at ING, in a report for clients collected by the economic information agency 'Bloomberg'.

In the most immediate term, the step taken in Sweden was not followed by the Bank of England, whose Governing Council decided this Thursday to maintain official interest rates at 5.25%. The institution that issues the British pound is reluctant to cut the official 'price' of money after taking it to 2008 highs from the 0.10% at which it was at the end of 2021.

The Bank of England is one of the most important central banks in the Western world along with the European Central Bank (ECB) and the Federal Reserve (Fed). The latter left interest rates at the highest levels of this cycle of monetary austerity to fight inflation last week (May 1), in its case in the range between 5.25% and 5.5%. At the beginning of April, the ECB also waited, although it admitted the moderation of inflation and also recognized the damage of its monetary austerity to families and companies.

The forecasts of the ECB's own economists suggest that inflation will drop to 2.3% on average in 2024 (close to the theoretical objective of 2%), price increases already slowed to 2.4% in the interannual rate in April In the eurozone, the risk of recession is very high in Germany or France, credit demand fell more than expected in the first quarter…

With these “data”, the relief for the pockets of families and for the companies themselves – especially for small ones, which cannot access advantageous financing, as large ones do – which would mean the lowering of the official 'price' of money—and therefore of mortgages and loans in general—seems undeniable. However, the Governing Council of the ECB said it needed more information, which would arrive in June, and regretted “the geopolitical risks (wars, especially Israel's genocide in Gaza)”, and its possible impact on the price of oil.

Starting in July 2022, the European institution decided to start a cycle of increases in the reference interest rates in the eurozone from 0% until leaving it at the current 4.5% in the fall of 2023. The debate among the members of the Governing Council of the ECB is intense, as can be seen from the various public statements, but it is unknown if any of them have already voted for a first rate cut. This decision-making body is made up of the governors of the central banks of each euro country (including Pablo Hernández de Cos, of the Bank of Spain) and the executive committee (led by president Christine Lagarde and vice president Luis de Guindos).

The Bank of England (BoE) is more transparent and does publish the different positions of the members of its Governing Council. At this Thursday's meeting, two of them favored a reduction, compared to 7 who refused. “We need to see more evidence that inflation will remain low before we can reduce interest rates,” states the official and consensus statement of the BoE, which also recognizes that “the restrictive stance of monetary policy is weighing on activity in the real economy.”

“The Fed is the gorilla in the room”

At the moment, beyond the weakness of economic activity, another factor weighs in the equation of the Governing Council of the ECB and the BoE: the Fed could delay its first cut in interest rates. Because? Because the economy and the labor market on the other side of the Atlantic show greater strength than in the eurozone, and inflation shows greater resistance to falling.

And why does what the Fed does influence the decisions of the ECB? Because there is a risk of a sudden depreciation of the euro against the dollar if the paths of one central bank and another diverge greatly. And a fall in the 'common currency' with respect to the North American currency automatically makes imports of oil, gas and most raw materials, which are normally traded in dollars in international markets, more expensive. That is, the risk of a depreciation of the euro is an inflationary threat in Spain, Germany, France, Italy…

At the press conference after the April Governing Council meeting, ECB President Christine Lagarde said that she “does not comment on the decisions or perspectives of other central banks” and that her decisions “do not depend on the Fed.” . On the other hand, Robert Holzmann, the governor of the Central Bank of Austria, assured this Wednesday that “we do not operate in a vacuum. The Federal Reserve with the dollar is, figuratively, the gorilla in the room (or the elephant in the room).”

The Fed will decide again on June 12, a week after the European institution, which will do so on June 6. The big question is whether the ECB will move before the Fed, even if the US central bank is then expected to delay its first cut to July 31.

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