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Fast Comment SwedenInflation still above target, but no policy change expected at Riksbank's February meeeting

  1. All is set for an uneventful policy meeting
  2. But upcoming repo rate rises also uncertain
  3. The Riksbank is not ready to end QE and will not be hasty in announcing its intentions, we believe
All is set for an uneventful policy meeting
On Tuesday, the executive board of the Riksbank will sit down for a monetary policy meeting and the February decision will be announced on Wednesday. Adding to the background ahead of this policy decision, alongside the last meeting's interest rate hike and the board's expectation of a hike in the second half of the year, is the increasingly cautious tone from other central banks. Additionally, analysis of the current state of the Swedish economy is in a wait-and-see-mode, as the extent of the rebound after negative growth in last year's third quarter is not yet known, due to mixed indicator data and delayed December growth statistics. In short, all is set for an uneventful policy meeting, and we do not expect a change to the policy rate or the rate forecast.
But upcoming repo rate rises also uncertain
Our main scenario is for the repo rate to be lifted once more in 2019-20, in September this year. The current period of goal achievement for the Riksbank has entered its third year, and we see good support for inflation, at least this year. However, we judge that average 2019-20 inflation will fall somewhat short of the two percent target. Therefore, the repo rate rise is uncertain, in our view. In the medium term, the collective wage agreements in 2020 will be essential to inflation, and when negotiations between the parties on the labour market, i.e. employers' and workers' representatives, begin this autumn, the sun will already have started to set on the economic boom. At next week's meeting, we suspect the Riksbank will revise down its growth forecast further, and this fragile economic climate, combined with the uncertain outlook for wage agreements, may also lead it to downgrade its forecast for underlying inflation, despite the recent krona weakening. The headline CPIF inflation forecast will likely be kept more intact following a renewed energy price pickup.
The Riksbank is not ready to end QE, and will not be hasty in announcing its intentions, we believe
This spring, another monetary policy issue returns to the agenda, namely the Riksbank's bond purchases. The Riksbank has stopped making the QE programme more expansionary, and there has been talk of a decrease in bond holdings. However, based on our view that the economic climate is deteriorating, our main scenario is that the Riksbank will more or less continue with an unchanged QE policy and reinvest a substantial part of the bond that matures in December 2020. We expect the executive board to start communicating on the issue of reinvestments at the April meeting, but concrete decisions may well come at a later time. We do not expect news on the issue in the February announcement.

Disclaimer

Johan Löf

Senior Economist

Sweden

jolo22@handelsbanken.se

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