The Riksbank lowered the so-called policy rate by 0.25 percentage points to 3.50 percent, citing a weak economy and stabilising inflation.

Recent inflation figures showed that inflation in July remained close to the Riksbank’s two percent target.

“Inflation has continued to fall and the prospects for inflation being in line with the target going forward are good. Long-term inflation expectations are signalling strong confidence in the target and wage increases are moderate,” said the bank in a statement.

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The lowering of the interest rate was expected, but the Riksbank also said it might cut the rate faster than previously advertised.

“If the inflation outlook remains the same, the policy rate can be cut two or three more times this year,” it said.

It had previously predicted one or two more rate cuts on top of the August cut.

The Riksbank, as usual, cautioned that “the outlook for inflation and economic activity is uncertain”.

“There are risks linked, for instance, to the geopolitical situation, economic activity in Sweden and abroad, and the krona exchange rate that can lead to a different outcome for inflation and thereby a different monetary policy,” it warned.

Future interest rate decisions are scheduled for September 25th, November 7th and December 18th.

Why is the policy rate important?

The policy rate is the central bank’s main monetary policy tool. It decides which rates Swedish banks can deposit in and borrow money from the Riksbank, which in turn affects the banks’ own interest rates on savings, loans and mortgages.

If bank interest rates are high, it’s expensive to borrow money, which means people spend less and as a result inflation drops.