Now It’s Sweden’s Turn to Share Rate-Hike View: Decision Guide

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Sweden’s central bank may or may not be about to share some clues on its plans for the first post-pandemic interest-rate hike in the largest Nordic economy.

Whether Riksbank officials signal future tightening is a key question overshadowing their decision on Thursday, where all economists surveyed by Bloomberg predict no change in the benchmark, currently at zero. The institution’s 700-billion-kroner ($82 billion) asset-purchase program is also expected to remain unaltered.

Sweden’s economic recovery and a global shift toward more hawkish policy have stoked speculation that the Riksbank will indicate a start to rate hikes in 2024. But the institution has shown no sign of rushing to change stance, and is also haunted by memories of a previous tightening cycle that attracted criticism from Nobel Prize winner Paul Krugman.

“One possible change in the July or the September report is that the endpoint of the rate path indicates a rate hike for the first time since the pandemic struck,” Torbjorn Isaksson, an economist at Nordea in Stockholm, said in a report.

Officials say they’re ready to let consumer-price growth temporarily overshoot their 2% target. While a house-price rally has brought criticism of loose monetary policy, a slowdown in core inflation has lessened the pressure, supporting the central bank’s view that a recent energy-led spike was temporary.

Swedish fixed-income investors are split on the outlook. Almost 40% in an SEB survey this month anticipate the Riksbank’s rate path signaling some probability of tightening during the forecast period, compared with 8% in April. The bank says market pricing is now for a hike by the third quarter of 2023.

What Bloomberg Economics Says...

“There’s a slight chance Governor Stefan Ingves will hint at future plans to raise rates. But the central bank has yet to shake off the damage to its reputation from going too early in the aftermath of the 2008 financial crisis. It won’t want to make the same mistake again.”

-Johanna Jeansson, Bloomberg economist

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Neighboring central banks are more hawkish, with Norway’s signaling a hike in September, while Iceland already tightened in May. Elsewhere, the Federal Reserve this month brought forward expectations of its own future rate increases.

Buoyant exports helped Sweden’s economy return to its pre-crisis level in the first quarter, well ahead of most other wealthy nations. While output unexpectedly shrank in April, most forward-looking data points to a robust recovery and growing optimism.

The Riksbank is unlikely to dwell on heightened political uncertainty after Premier Stefan Lofven submitted his resignation this week, according to economists.

“The only thing affecting the Riksbank is the budget and fiscal policy, and given that it’s already set for this year, it will not become a potential issue before later this fall,” SEB’s fixed income strategist Lina Fransson said.

©2021 Bloomberg L.P.