Sweden’s central bank lowered its policy rate for the first time in eight years and signaled another two more rate reductions during the second half of the year as inflation approaches the target of around 2 percent amid the weak economic activity.

The executive board of the Riksbank, led by Governor Erik Thedeen, decided to lower the policy rate by 25 basis points to 3.75 percent.

This was the first rate reduction since February 2016. Sweden became the second major central bank after the Swiss National Bank to move ahead of the US Federal Reserve.

“If the outlook for inflation still holds, the policy rate is expected to be cut two more times during the second half of the year,” the bank said.

The previous change in the rate was a quarter-point hike in September last year, which marked an end to the tightening cycle that began in May 2022.

The outlook for inflation remains close to the target in the longer term and inflation expectations are firmly anchored and wage increases are moderate, the Riksbank said.

However, as the outlook for inflation is uncertain, the bank said the adjustment of monetary policy going forward should be characterized by caution, with gradual cuts to the policy rate.

Despite the rate cut, the bank is treading carefully amid ongoing concerns about the risk of a weaker currency, ING economist James Smith said.

With Sweden’s interest rate-sensitive economy coming under greater pressure, further rate cuts look inevitable later this year, the economist added.