Negative Rates Turn Three in Sweden as Riksbank Seeks Way Out

(Bloomberg) -- Almost exactly three years ago Sweden’s central bank cut interest rates below zero and unleashed a bond buying program to jolt the economy out of deflation. The conjuring of new money to buy bonds has now ended, but the negative rates may be more resilient.

Sweden’s biggest bank, Nordea Bank AB, says it sees a “risk” that the Riksbank when it announces its next decision on Feb. 14 will push back its forecast for a rate increase in the middle of 2018 as sluggish wage growth threatens its inflation outlook.

“Looking ahead, we don’t expect any rate hikes at all in 2018, as we expect inflation to fall and not be high enough to warrant a rate hike,” said Torbjorn Isaksson, chief analyst at Nordea. “Good global trends are positive factors, but inflation and domestic growth are decisive trends for the Riksbank.”

Even so, Nordea is a bit of an outlier and most banks predict the Riksbank will follow through on its forecast to raise rates this year as stimulus is withdrawn globally. Swedish policy makers including Governor Stefan Ingves have been emphasizing that inflation is now at their target and economic growth is robust, saying they see no hindrance in tightening policy before the European Central Bank.

A survey by Bloomberg showed all 22 economists anticipate that the bank will hold its benchmark repo rate at minus 0.5 percent this week.

Here’s what the biggest Nordic banks say:

SEB AB: The main scenario is for an unchanged repo rate path, with 15 percent “probability” that rate increase is delayed by one quarter and a 5 percent chance that the probability for an increase already in July is “increased slightly.”

Nordea: The “baseline scenario” for an unchanged rate path, although the end point will likely be raised to just below 0.9 percent since the path now covers the period up to the first quarter of 2021.

Danske Bank A/S: Expects monetary policy stance and communication to be relatively intact from December, with not much new information to go on and incoming data that have been in line with forecasts.

Svenska Handelsbanken AB: Expects “small changes” in Riksbank forecasts, with krona marginally stronger, inflation a tad lower and below forecast wage development. But small adjustments don’t necessarily mean that it will change its rate path.

Swedbank AB: The Riksbank will leave the rate path unchanged even as it revises down its near-term inflation forecast.

DNB ASA: Policy rate and rate path to remain unchanged with bank sticking to its reinvestment plan of 20 billion kroner in both first and second half of 2018 and the same amount in first half of 2019

--With assistance from Joshua Robinson

To contact the reporters on this story: Love Liman in Stockholm at jliman1@bloomberg.net, Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net.

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

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