By Simon Johnson

STOCKHOLM (Reuters) – Sweden's central bank cut its key interest rate by a quarter percentage point to 2.50% as expected on Thursday. After easing policy five times this year, it now sees reasons to be more cautious as it enters 2025.

Sweden's economy has been treading water for the last two years after the Riksbank raised rates to combat surging inflation, which peaked around 10% in late 2022.

Since starting to cut rates again in May, inflation is now below the 2% target. However, households and businesses remain wary about spending, and inflation has edged up again in recent months.

The Riksbank stated, "If the outlook for inflation and economic activity remains unchanged, the policy rate may be cut once again during the first half of 2025." In November, the central bank made a larger-than-usual half-percentage-point cut, suggesting further cuts could occur in December or once or twice in early 2025.

The Riksbank emphasized, "The interest rate has been reduced rapidly and monetary policy affects the economy with a lag," advocating for a cautious approach to future policy formulation.

Following the announcement, the Swedish crown strengthened. Adrian Prettejohn, Europe Economist at Capital Economics, mentioned, "We now expect just one more 25 basis point cut next year, in March, as we think the economy will start to pick up soon."

The Riksbank's cautious stance aligns with the U.S. Federal Reserve, which also cut rates as expected but anticipates fewer cuts next year than previously thought. Norway's central bank held its key rate steady on Thursday, while the Bank of England will announce its policy decision later in the day.

A Reuters poll revealed analysts unanimously expected a quarter-point cut, forecasting two more cuts in the first half of next year, stabilizing at a policy rate of 2.00%.