Swedish Central Bank Unexpectedly Sticks to Plan to Raise Rates

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Sweden’s central bank kept plans intact to exit negative interest rates toward the end of the year, arguing that expectations of further stimulus don’t reflect the “normal” slowdown in economic growth now seen domestically and abroad.

After a decision in Stockholm, Governor Stefan Ingves said the Swedish economy is now entering a calmer phase, but that risks abroad suggest that rate increases will need to be carried out at a slower pace. He left the benchmark at minus 0.25% as expected. The krona jumped on the news, with many having expected policy makers to abandon altogether their plans to hike rates.

Ingves, who said 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 other peers around the world, including the U.S. Federal Reserve, add stimulus. But he also joins others in taking a wait-and-see approach. The central banks of Canada and Australia this week held rates and signaled they were in no hurry to cut.

“It’s a rather wise decision,” said Andreas Wallstrom, an economist at Swedbank AB. “The Riksbank is in a wait and see situation.”

The Riksbank justified its stance by arguing that inflation is close to its 2% target. “Even though economic activity has slowed down a little faster than expected, resource utilization continues to be higher than normal and is helping inflation stay close to the target,” the bank said.

But economists weren’t convinced. “Given the uncertainty that currently exists in the global economy, and the weakness we’re seeing in global industry, as well as signs of weakness starting to show in the Swedish economy, it therefore seems to us to be unlikely that the Riksbank will be able to raise rates for quite a while,” said Frederik Engholm, chief strategist at Nykredit in Copenhagen.

Policy makers in Sweden have kept markets guessing after showing they were ready to go against the monetary tide set by the world’s major central banks. The Riksbank raised its main rate in December, and has made clear it wants to return to positive rates as soon as possible.

But with a trade war between China and the U.S., the prospect of a messy British exit from the European Union and broader fears of a recession, many analysts have questioned the Riksbank’s tightening resolve.

Nordea, the biggest Nordic bank, said on Wednesday it thinks the Riksbank will need to cut its main rate to minus 0.5% before the end of 2019, with no prospect of a hike until late 2021. It says there’s now a risk Sweden’s economy will contract in the coming quarters, amid “weak” household spending and “falling investment.” Nordea also warned of “stagnant exports and lower employment.”

In its statement on Thursday, the Riksbank painted a bleak picture of the global outlook.

“GDP growth abroad, which has been strong for several years, has now slowed and is expected in the coming years to be approximately in line with a historical average. During the year, however, sentiment has worsened, due in part to the trade conflict between the United States and China and the uncertainty surrounding the United Kingdom’s exit from the EU.”

Martin Enlund, chief analyst at Nordea in Stockholm, said the Riksbank “remains too optimistic on growth, on the labor market, and, of course, on inflation.”

--With assistance from Niklas Magnusson and Veronica Ek.

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

To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net;Jonas Bergman at jbergman@bloomberg.net

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