Swedish Central Bank Seen Following ECB in Ditching Easing Bias

(Bloomberg) -- The world’s oldest central bank may be about to follow in the footsteps of its European peer in Frankfurt in scrapping the chances of an interest rate cut as concerns about deflation subside across the continent.

Sweden’s Riksbank, founded 330 years before the European Central Bank, is expected to remove its easing bias when it announces its next rate decision on July 4, according to investors and analysts. All of the 19 economists surveyed by Bloomberg predict the key repo rate will remain at its record low of minus 0.50 percent, where it’s been since early 2016.

There are plenty of reasons why the Riksbank’s rate path might be revised upwards.

For starters, the political risks cited by the central bank when it unexpectedly decided to expand its quantitative easing program in April have failed to materialize. Rather, the victory in the French presidential election of Emmanuel Macron, a free-trader, over Marine Le Pen, a protectionist, is "positive for the European economic outlook," in the view of Capital Economics.

Secondly, inflation appears to be finally getting a foothold in Sweden, with the underlying rate inching closer to the bank’s 2 percent target since the start of the year. Inflation expectations are also more anchored, rising to a five-year high in June.

A third reason for betting on a neutral bias is that concerns about a strengthening krona have come to naught, with the effective exchange rate (KIX) weakening for most of the year. That could potentially allow the bank to let up on its currency vigilance for just a bit.

But not all analysts are convinced that next week’s meeting will produce change. After all, it has been a long struggle for the central bank and it’s keen to avoid backtracking.

Torbjorn Isaksson of Nordea Bank AB expects the Riksbank to "once again" ignore the strong developments in the economy and instead "do its utmost to avoid inflation settling at too low levels." That means leaving the monetary policy took box untouched and the rate path unchanged.

"The upturn in inflation is fragile and, as previously, the Riksbank will not risk inflation falling back as a result of rapid krona appreciation,” he said. “Against this backdrop, staying sidelined and leaving monetary policy unchanged, including the easing bias in the rate path in the short term, is very cheap protection against low inflation.”

Still, perhaps the most important argument for predicting that the Riksbank will become a little more hawkish next week is that it simply can’t afford to ignore what’s been happening elsewhere.

"If the Riksbank keeps the easing bias, it would stand out in a very dovish way vis-a-vis other central banks," Danske Bank A/S wrote in a note to clients, citing recent policy shifts by the ECB as well as in Norway, the U.K. and Canada.

Should the Riksbank board "continue to err on the side of caution, the reaction in the krona could be brutal," Danske said.

--With assistance from Love Liman and Joshua Robinson

To contact the reporter on this story: Nick Rigillo in Copenhagen at nrigillo@bloomberg.net.

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net.