Riksbank Hike Amid Storm Warnings Leads to Months of Inaction

(Bloomberg) -- After raising interest rates late last year, Sweden’s central bank now has little choice other than to wait for a better economic outlook before pushing ahead with its long-awaited tightening cycle.

The December increase was the first in seven years, and brought the main rate to minus 0.25 percent. But already then, the Riksbank indicated the next increase won’t be until the second of half of this year. Anders Borg, a former finance minister, even suggests the Riksbank may need to wait longer, arguing in a recent interview that “autopilot is not a concept that should exist in monetary policy.”

Riksbank Hike Amid Storm Warnings Leads to Months of Inaction

Governor Stefan Ingves and his fellow board members have acknowledged that the economic challenges are growing. He has sought to reassure markets that the Riksbank will pay close attention to all the economic signals before doing anything.

For those reasons, the bank is expected to refrain from making any adjustments to its forward guidance as policy makers meet to discuss Swedish interest rates this week. Their talks take place against the backdrop of the Federal Reserve making a U-turn on its tightening cycle and as central bankers in Frankfurt and London have recently signaled more pessimism.

“By signaling a next rate hike in September, the Riksbank has given themselves some space to wait and see before potentially changing the guidance later,” said Torbjorn Isaksson, chief analyst at Nordea Bank Abp.

All 19 economists in Bloomberg’s survey expect the Riksbank to announce an unchanged repo rate on Feb. 13. The largest Nordic banks also anticipate no change in the forward guidance and that any decision on whether to extend bond purchases will be put off until April.

The Riksbank has sought to emphasize that it doesn’t want to slow down Sweden’s economy. Nevertheless, growth is cooling fast after a long economic boom. According to the latest forecast from the European Commission, Sweden will be among the EU’s slowest growing economies this year. High debt levels and sinking home prices are adding to the risks.

What the largest Nordic banks say:

“After the ‘dovish’ rate hike in December, we believe it will be more cautious this time. A rate hike isn’t likely until this fall at the earliest. Next on the agenda is the central bank’s balance sheet, where we don’t see a decision until the April meeting.”
Nordea Bank:
“We expect unchanged policy and no new signals. The Riksbank will hardly see any domestic reasons for hiking the rate in the next few years. We see a repo rate hike in December 2019 because we judge that the Riksbank will shadow the ECB. The mandate to rapidly intervene in the currency market may be prolonged, but is of less importance.”
Danske Bank:
“We see no significant revisions for this meeting, even though the board might choose to express higher uncertainty regarding the global economy. This could be negative for krona. One thing worth looking out for is that the mandate for FX interventions expires. This could be removed. If so, we might see some positive response from the krona.”
Svenska Handelsbanken:
“All is set for an uneventful policy meeting, and we do not expect a change to the policy rate or the rate forecast. Our main scenario is for the repo rate to be lifted once more in 2019-20, in September this year. We expect the executive board to start communicating on the issue of reinvestments at the April meeting.”
The rate and rate path will be kept unchanged, “signaling a first rate hike in the second half of this year (most likely in September).”
The Riksbank “could still want to remind markets that a fast strengthening of the krona is not wanted. We think it slightly more likely than not that the mandate (for FX interventions) is prolonged.”

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