Sweden’s Riksbank Meeting Unlikely To Lift Krona

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).

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