(Bloomberg) -- Sweden’s Riksbank lowered borrowing costs for a second time since May and sketched out more easing than previously expected as inflation has fallen below its target and the largest Nordic economy is sputtering.

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The central bank, which cut its benchmark rate to 3.5% from 3.75% in a decision announced on Tuesday, said it could consider as many as three more reductions this year. Its previous guidance had implied a maximum of two cuts after today.

Tuesday’s cut had been anticipated by all economists surveyed by Bloomberg after the Riksbank started easing in May as one of the first in the rich world since the pandemic.

The market has priced in much faster reductions than penciled in by Governor Erik Thedeen and his deputies. Calls for more rapid monetary easing have increased recently as inflation has undershot the bank’s 2% target since June and Swedish consumers remain under pressure from high borrowing costs.

“Being ‘behind the curve,’ Riksbank today sent the message that it is now prepared to cut the repo rate another two to three (times 25 basis points) which is exactly what is already being priced in the money market,” Danske Bank A/S’ chief economist for Sweden, Michael Grahn, wrote in a post on X.

The Swedish krona initially inched lower against the euro after the decision before strengthening as much as 0.4% to 11.3788, its strongest level in over one month. The risk-sensitive currency is rebounding from the lowest level this year hit after the market rout in the late July and has been one of the best performing Group-of-10 currencies so far in August.

Traders in overnight swaps largely kept their bets intact. They fully price in three more rate cuts by the end of the year.

“If the inflation outlook remains the same, the policy rate can be cut two or three more times this year, which is somewhat faster than the Executive Board assessed in June,” the Riksbank said in a statement.

That means rates could be as low as 2.75% at the end of the year, compared with a bottom of 3% guided in June, when its estimates implied that inflation is likely to remain below 2% through this year and next. No detailed forecasts or rate path were published in conjunction with Tuesday’s announcement.

What Bloomberg Economics Says...

“The central bank’s two policy steps in its August meeting — a return to cutting rates and a dovish shift in guidance — are in line with our baseline expectations for the policy rate reaching 3% by year end on tame inflation and weak activity. Risks to this outlook are skewed toward rate cuts in all three remaining meetings this year.”

—Selva Bahar Baziki, economist. For her SWEDEN REACT, click here

Still, the officials said that new information since June indicates “that the growth outlook in Sweden and abroad is somewhat weaker than in the most recently published forecast.”

“The comments that they can cut an additional two to three times and ‘somewhat faster’ than previously imagined is somewhat dovish compared to our base case of two additional cuts but in line with current pricing,” Danske Bank A/S analyst Jesper Fjarstedt said. He added figures “should not be interpreted as overly dovish compared to what is already priced in the krona.”

Analysts at Swedbank AB and Svenska Handelsbanken AB changed their forecast to cuts at every remaining rate meeting this year — September, November and December.

Sweden’s economy is more sensitive to monetary policy shifts than many European peers as mortgage rates are often fixed on relatively short terms. While easing expectations led to improved sentiment in the Nordic economy earlier this year, economic data shows that an expected recovery has yet to gain momentum.

A preliminary reading of economic output in the second quarter even indicated a considerable contraction, and labor market statistics show that unemployment is rising.

The weakness in the Swedish krona has been a major concern for officials as it may fuel price gains on imported goods. That risk remains, policymakers said, and could “lead to a different outcome for inflation and thereby a different monetary policy.” However, increasing bets on rate cuts in the euro area and the US may provide some comfort for the Riksbank.

“About the krona exchange rate, there are both uncertainties on where it will go and what the effect of it will be on inflation,” Thedeen told reporters. “The krona has turned out to be rather volatile over the summer months. It illustrates that there is reason to keep it on the radar.”

The central bank is unlikely to move much faster than the ECB, according to Ulf Andersson, chief economist for Sweden at DNB Bank ASA.

“Moving more than 25 basis points ahead of the ECB will not be without concerns for the Riksbank as such a move would risk undermining the confidence for the krona further,” he said in a note to clients. “For the time being, we maintain our forecast of another cut in September, preceded by a cut from the ECB, and in December and March next year, finally reaching a policy rate of 2.75%.”

--With assistance from Rafaela Lindeberg, Joel Rinneby, Anton Wilen, Charles Daly, Stephen Treloar, Christian Wienberg, Jonas Ekblom and Alice Atkins.

(Updates with comments from analysts, Bloomberg Intelligence, Thedeen from fourth paragraph)

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