Describing economic growth in Sweden currently as experiencing "full-on deterioration", Handelsbanken has warned in a note that the country is set to suffer from exogenous factors such as Brexit and the US/China trade war, with the implication that the Riksbank's repo rate will remain negative "for several years to come".
Christina Nyman, chief economist, said that there does not seem to be any quick fix as the level of global economic uncertainty persists.
"Naturally, central banks, led by the US Federal Reserve, will do what they can and cut key rates further, but the global economy looks as if it will continue cooling off for the next year."
Data in Sweden points to unemployment increasing, while employment has stopped increasing. This is the context for collective bargaining negotiations meant to determine agreements covering 2020 onwards.
The bank stated: "Given that Handelsbanken foresees rising unemployment and a cooler economy, wage increases are expected to be low. This will help to put a damper on inflation in the future. However, the deviation from the Riksbank's 2%t target will not become so great that the credibility of the target is jeopardised."
"Nor do we believe that the Riksbank will be forced to cut the repo rate, just to achieve its target. Instead, we expect the Riksbank to successively postpone its indicated rate hikes, and leave the repo rate unchanged for the next few years."
Nyman added that the risks associated with a no-deal Brexit and the US/China trade war stems from the fact that as a relatively small and export based economy, Sweden will be hit "extra hard". Should the deterioration be significant, then the central bank would respond with rate cuts and possibly increased asset purchases. But monetary policy alone might not be enough, and a fiscal response would undoubtedly be required too.
"The Riksbank does not have a great deal of scope to mitigate the negative effects. Therefore, the government would doubtlessly need to take action in such a scenario, possibly by providing the municipalities with additional funds in the budget," she says.