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Fast Comment SwedenHawkish Riksbank will eventually find that it must cancel planned rate rises

  1. Riksbank keeps rate path, but we stick to our forecast for an unchanged policy rate through to 2021
  2. As fully expected, no policy rate cut today, but other elements partly surprised the market
  3. Global central banks signal policy easing, but lower policy rate in Sweden still far off
Riksbank keeps rate path, but we stick to our forecast for an unchanged policy rate through to 2021
At its July meeeting, the Riksbank not only kept its verbal guidance of a repo rate rise "toward the end of the year or at the beginning of next year", but also its repo rate forecast. It means the Riksbank still sees a probability of an October rise. However, the current executive board of the Riksbank has repeatedly struggled to find reasons to follow through on its planned rate rises. With that in mind, we cannot see that it will find enough to raise the repo rate around year end. Admittedly, we think inflation will be around two percent even then, but, crucially, the inflation outlook will have deteriorated. And add to that a slowing cycle and a worsening labour market.
As fully expected, no policy rate cut today, but other elements partly surprised the market
Today's policy announcement was more hawkish compared to our expectations, but our interpretation of surveys and commentary was that analysts were split roughly 50/50 on whether the Riksbank would soften the tone. At the same time, market participants appear to have been leaning more clearly toward a dovish decision, similar to our anticipation, judging by pricing, which points to a decrease rather than an increase in the repo rate around year end. All told, the slightly hawkish surprise strengthened the krona and pushed interest rates higher.
Global central banks signal policy easing, but lower policy rate in Sweden still far off
The last nail in the coffin for the Riksbank’s rate rise case will likely be rate cuts by the Federal Reserve and the ECB. Earlier this week, we changed our forecasts for global monetary policy toward a more expansionary stance (see macro comment here: https://bit.ly/2XiFwEj). We have had rate cuts by the Federal Reserve next year in our forecasts for some time, but we now expect them sooner (July, but a close call). We expect the ECB to adjust forward guidance in July, then cut rates in September and likely introduce quantitative easing thereafter. Ultimately, however, we do not expect the Riksbank to cut further into negative territory, other than in the case of a severe economic crisis.


The executive board of the Riksbank have repeatedly found reasons to hold off planned rate rises. Not so today, but we stick to our forecast for no further hikes 2019-2021 




The Riksbank continues to forecast weaker and weaker long term krona developments, much like the conclusions in our own analysis where we see equilibrium EUR/SEK at 10 or even weaker. See Macro Comment here: https://bit.ly/2XmZFcB  



Disclaimer

Johan Löf

Senior Economist

Sweden

jolo22@handelsbanken.se

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