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Riksbank’s Hawkish Flight About to Be Cut Short by ECB Snipe

Riksbank’s Hawkish Flight About to Be Cut Short by ECB Snipe

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The Riksbank has a history of having its plans to raise interest rates dashed by bigger powers and it looks like it’s about to repeat itself.

Policy makers in Stockholm on Thursday delivered a surprisingly upbeat assessment of the economy as they stuck to a plan to raise toward the end of the year or early next year.

The krona jumped as traders reassessed bets on a rate cut. But it didn’t take long before doubts took hold over the Swedish central bank’s ability to lift rates to zero again after more than four years of negative rates as the European Central Bank prepares to unveil more stimulus next week.

“Ultimately, it’s very remote we will get another rate hike in the context of other central banks easing policy and global growth slowing,” said Carl Hammer, chief currency strategist at SEB.

Riksbank’s Hawkish Flight About to Be Cut Short by ECB Snipe

Governor Stefan Ingves, who said Thursday that he doesn’t see any need to cut rates, is betting that the Swedish economy will avoid a deeper slowdown, going against the grain as bigger peers around the world, including the U.S. Federal Reserve, add stimulus. But he also joins others in taking a wait-and-see approach. Central banks in Australia and Canada this week held rates and signaled they were in no hurry to cut.

Ingves touted the “strong” Swedish economy, arguing it’s entering a calmer phase. Nevertheless, in a nod to risks abroad, the bank revised down its rate path sharply, and now expects only about two rate increases through mid-2022. He left the benchmark at minus 0.25% as expected.

Jonas Thulin, head of asset management at Erik Penser Bank, said the Riksbank will be forced to abandon tightening after the ECB adds more stimulus.

“They keep the door open to quickly adjust its view would there be a negative development abroad,” he said. “That they are so forcefully adjusting the path is a sign that they are preparing the market for what lies ahead.”

Sweden’s outlook has deteriorated fast this year, with economic growth even contracting in the second quarter. Unemployment has risen to a three-year high and confidence measures have declined for four months.

Danske Bank A/S Chief Economist Michael Grahn, who has predicted a rate cut early next year, said the decision on Thursday was “incomprehensible.”

“The Riksbank still perceives the economy as ‘strong,’ even though most economic indicators signals a marked slowdown,” he said.

While the bet is now on that the bank will be forced to scrap its tightening plans yet again, the Riksbank’s decision on Thursday was greeted with understanding in some quarters.

Andreas Wallstrom, an economist at Swedbank AB, said that while the adjustment of the rate was surprising it also made sense.

“What will decide the Riksbank’s moves going forward is very much related to what ECB will do and, of course, how deep the global downturn will be,” he said. “We have only seen the beginning of it so there wasn’t really a reason for the Riksbank today to adjust the forecasts very much.”

To contact the reporter on this story: Rafaela Lindeberg in Stockholm at rlindeberg@bloomberg.net

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

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