Krona Rallies After Riksbank Delivers First Rate Hike In Seven Years

The world's oldest central bank delivered a holiday surprise for krona bulls on Thursday when Sweden's Riksbank raised its benchmark repo rate off the crisis-level -50 basis points to -25 bps, its first - and unexpected - rate hike in seven years. The decision, which was anticipated by only 10 of 24 analysts polled by Bloomberg, sparked a rally in the Swedish krona sending it almost 1% higher to trade at 10.26 to the euro, its biggest jump since early October.Putting the news in context, Capital Economics noted that markets were pricing in less than a 10% probability of a hike yesterday.

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Despite a raft of weak inflation data that had led most analysts to push back their rate-hike expectations until February, the central bank decided to hike in order to "maintain credibility" after five years of forecasting rate hikes that never happened. Prior to the hike, the Riksbank advised that a hike could arrive either late this year or during its February meeting. Inflation expectations now appear "established" at around the Riksbank’s 2% target, which suggests that "the need for a highly expansionary monetary policy has decreased slightly," the bank said in a statement. The bank's board, which voted 5-1 to raise rates, said the next hike would probably come during the second half of 2019. However, the upside for the krona was probably limited by the fact that the bank lowered its interest-rate forecast for next year, lowering the repo rate forecast by 11bp by end-2019 and 18bp by end-2020.

Nordea economist Torbjorn Isaksson told Bloomberg that the wording of the bank's statement "strengthens our view that the next rate hike is a long way off."Svenska Handelsbanken Chief Economist Christina Nyman declared it a "very dovish hike.”

Swedish economic activity has been robust, the bank said in its statement, ignoring a raft of weak inflation and growth data. And despite worries about a decline in global trade thanks to the Trump trade war, the Riksbank said that "the employment rate is historically high, companies are reporting major shortages of labor and cost pressures are rising," removing the need for such accommodative policy, though the bank said that policy "is still expansionary."

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