End of easing seen in Sweden

Sweden’s central bank, the Riksbank, has left its key repo rate unchanged at -0.35%, which observers have suggested signals the end of its monetary easing programme ahead of possible rate hikes later in 2016.

The bank pointed to stronger than expected economic growth in the Swedish economy, but also noted that “uncertainty remains globally”.

It is also not certain that inflation is fully on track to return to historical mean levels, without which it would be forced to continue delaying any rate hikes.

“To safeguard the resilience of the upturn in inflation, monetary policy needs to remain very expansionary,” the Riksbank added. And there are also technical factors in the return of inflation that were noted; a weak krona is expected to continue contributing to inflation thorugh next year, but higher levels of demand will be required to generate more inflation domestically within the economy, the bank said.

“The Executive Board deems that the repo rate will not be raised until CPIF inflation has stabilised around 25 during the first half of 2017.”

“The Riksbank is also ready to intervene on the foreign exchange market if the upturn in inflation should be threatened as the result of a problematic market development, for example. Moreover, the Riksbank is prepared to launch a programme of lending to companies via the banks.”

Forecasts for Swedish inflation, GDP, unemployment and the repo rate*
2014 2015 2016 2017 2018
CPI -0.3 0.0 (0.0) 1.3 (1.4) 2.5 (2.4) 3.0 (3.1)
CPIF 0.5 0.9 (0.9) 1.7 (1.8) 2.2 (2.1) 2.2 (2.2)
GDP 2.3 3.7 (3.3) 3.6 (3.0) 2.9 (2.7) 2.5 (2.3)
ages 15-74, per cent
7.9 7.4 (7.4) 6.8 (7.1) 6.7 (6.9) 6.9 (6.8)
Repo rate, per cent 0.5 -0.3 (-0.3) -0.4 (-0.4) -0.1 (-0.1) 0.5 (0.5)

*Annual percentage change, annual average. Sources: Statistics Sweden and the Riksbank

Nordea Markets analysts said that the announcement was “very much in line with our call”.

They expect the bank’s next big move, a rate hike, to come later in 2016, although the inflation risks outlined suggests that this could also be delayed further.

Peter Rosenstreich, head of Market Strategy at Swissquote Bank, also noted the widely held market expectations that the bank would hold its key rate unchanged at -0.35%.

“The less aggressive strategy by the ECB has clearly provided the Riksbank with breathing room,” he said.

“Despite the widely expected outcome the EURSEK dropped to 9.2670 from pre decision rally of 9.3628. The steady positive development on Sweden’s growth side and hesitation by the ECB to ease aggressively suggests further SEK recovery in 2016. Break of 9.300 uptrend channel indicates traders will be targeting 9.2213 horizontal support then range lows at 9.1837.”



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