The Swedish central bank's decision to slash its main
interest rate to zero percent to combat deflation has prompted
speculation that the bank's next move may mirror action taken by its
Swiss counterpart.
A cut by the Riksbank had been anticipated, but many economists had not expected the rate to be slashed all the way to zero from 0.25 percent.
Read MoreSwedish central bank cuts rates to zero
A cut by the Riksbank had been anticipated, but many economists had not expected the rate to be slashed all the way to zero from 0.25 percent.
Read MoreSwedish central bank cuts rates to zero
Bloomberg | Bloomberg | Getty Images
Loose monetary policy by the European Central Bank (ECB)
has helped keep the Swedish krona strong against the euro, making life
harder for Swedish exporters and adding to the downward pressure on
inflation.
Low inflation has been a concern for the Swedish central bank – it now expects inflation to average -0.2 percent this year and 0.4 percent in 2015.
While Tuesday's news sent the Nordic country's currency sharply lower against the euro, many analysts believe the reprieve will be short-lived. The euro rose to 9.3450 kronas, its highest since early July.
Read MoreFirst Europe stress tests, next full QE?
"Given that inflation is very weak elsewhere in Europe and that oil prices have been falling, there is still scope for inflation to surprise to the downside," analysts at
Capital Economics said in a note on Tuesday. "The ECB may well launch a broad-based asset purchase program soon. As a result, today's sharp fall in the krona against the euro may not be sustained. "
They believe the most likely way for the Riksbank to tackle weak inflation is to follow in the footsteps of the Swiss National Bank and impose a floor on the euro/krona exchange rate.
Switzerland put a floor under the franc to prevent it from strengthening beyond 1.20 to the euro in 2011 amid concerns that a strong Swiss franc was hurting its competitiveness.
"From the press release it is clear that the Riksbank is concerned over the too low inflation. They state that the repo rate will be held at zero until inflation 'clearly' picks up," analysts at Nordea Markets said.
They also point to potential further easing by the ECB which could once again send the euro lower against the krona.
While Nordea does not expect the Riksbank to introduce unconventional measures, "a floor for the krona exchange rate against the euro is the most likely choice".
Follow us on Twitter: @CNBCWorld
Low inflation has been a concern for the Swedish central bank – it now expects inflation to average -0.2 percent this year and 0.4 percent in 2015.
While Tuesday's news sent the Nordic country's currency sharply lower against the euro, many analysts believe the reprieve will be short-lived. The euro rose to 9.3450 kronas, its highest since early July.
Read MoreFirst Europe stress tests, next full QE?
"Given that inflation is very weak elsewhere in Europe and that oil prices have been falling, there is still scope for inflation to surprise to the downside," analysts at
Capital Economics said in a note on Tuesday. "The ECB may well launch a broad-based asset purchase program soon. As a result, today's sharp fall in the krona against the euro may not be sustained. "
They believe the most likely way for the Riksbank to tackle weak inflation is to follow in the footsteps of the Swiss National Bank and impose a floor on the euro/krona exchange rate.
Switzerland put a floor under the franc to prevent it from strengthening beyond 1.20 to the euro in 2011 amid concerns that a strong Swiss franc was hurting its competitiveness.
"From the press release it is clear that the Riksbank is concerned over the too low inflation. They state that the repo rate will be held at zero until inflation 'clearly' picks up," analysts at Nordea Markets said.
They also point to potential further easing by the ECB which could once again send the euro lower against the krona.
While Nordea does not expect the Riksbank to introduce unconventional measures, "a floor for the krona exchange rate against the euro is the most likely choice".
Follow us on Twitter: @CNBCWorld
Antonia Matthews
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