The Riksbank took the historic step of lifting the repo rate out of negative territory back in December. But the central bank’s new forecasts and cautious commentary imply that this was a ‘one and done’ move. We see limited upside to the Swedish krona from Wednesday's meeting.

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The bar for changing rates is set pretty high

The minutes from the December meeting emphasized that the Riksbank could cut rates again if needed, although in reality, we think the bar to either cut, or indeed hike rates anytime soon is set relatively high.

We suspect we’d need to see a more pronounced downturn in activity for policymakers to contemplate negative rates again. Riksbank officials are wary of the side effects if the policy were to be perceived as semi-permanent. It’s also worth remembering that the central bank has become much more relaxed about the prospect of currency appreciation, following a period of SEK weakness over the past couple of years.

On the flip side, we think we would need a fundamental revival in global growth – led perhaps by a prolonged period of stability in trade tensions, and a decline in the risk posed by coronavirus – for policymakers to start thinking about raising rates further.

What to expect at this Wednesday's meeting

That’s not too say this meeting will be completely unexciting. It will be interesting to see if the Bank revises its forecasts downwards – particularly for prices. Inflation looks set to come in a bit lower in the short-term following a fall in energy prices. Policymakers will also be keeping a wary eye on the current round of wage negotiations, which will set the tone for inflation for the next couple of years.

There are few reasons to expect a meaningful higher pay settlement than back in 2017. The labor market is weakening, while inflation expectations have remained muted among labor organizations (both employer and employee).

On growth, there have been some tentative signs that the slowdown in manufacturing is starting to bottom out. However, the risks from the coronavirus may well hold back a more sustained recovery.

That aside, we’re likely to see a similar interest rate projection as before (see Fig 3). The bottom line is that rates are unlikely to move again in either direction any time soon.

Source: ING, Bloomberg, Macrobond

SEK: Very limited upside – again

While the coronavirus dent to risk appetite pushed EUR/SEK higher, SEK has been the outperformer among the G10 cyclical currencies as, out of its peer group, the krona is the only non-commodity currency (compared to the New Zealand, Australian and Canadian dollars and the Norwegian krone). As Figure 4 shows, SEK is not in, nor close to the non-desirable top right-hand side quadrant. Hence, its outperformance in the latest environment where higher beta commodity currencies got punished the most (see Coronavirus: Gauging the market fall-out for more for our vulnerability analysis).

Given the downward revisions to global growth and trade due to the impact of the coronavirus (with the effect being reflected both in the first and second quarters via the manufacturing and consumer channels), we see krona upside vs the euro as limited and look for the EUR/SEK to trade around the 10.60 level. With Sweden being a small open economy (meaning that the downside risks to global trade and growth are negative for the krona) and SEK exerting the second most negative real rate in the G10 FX space (after the euro), there are few reasons to be cheerful about SEK. As the risk of the next Riksbank move is marginally on the dovish vs the hawkish side, the central bank is unlikely to be a supportive factor for SEK. Given that little change is expected from the Riksbank on Thursday, EUR/SEK reaction should be muted.