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Sweden Monetary Policy September 2019

Sweden: Riksbank holds fire in September as expected, but surprises analysts with hawkish forward guidance

At its 5 September monetary policy meeting, the Riksbank left the repo rate unchanged at minus 0.25%, as had been widely expected by market analysts. In addition, the Central Bank continued to emphasize that it would be raising the repo rate “towards the end of the year or at the beginning of next year”, although low interest rates abroad and worsening economic sentiment at home forced it to consider a slightly slower pace of rate hikes than previously planned.

Sweden’s economy unexpectedly contracted in the second quarter of this year, not long after it last contracted in Q3 2018. As a result, some FocusEconomics panelists had expected the Riksbank to adopt a less hawkish tone at the September monetary policy meeting and at least significantly delay the next planned rate hike; however, instead, the Central Bank largely stuck to its previous forward guidance, pointing to continued close-to-target inflation and referring to the current economic slowdown as a “calmer phase”. News of the Riksbank’s continued hawkishness led to a rally in the Swedish krona against both the euro and dollar.

Reflecting on the meeting, Chiara Silvestre, an economist at UniCredit, noted: “We remain skeptical that the [Central Bank] will be able to hike, given an environment in which global growth is likely to slow further and macroeconomic uncertainty remains elevated […] Monetary policy in Sweden, a small open economy, is unlikely to be able to diverge significantly from the global easing cycle, particularly the ECB, which is set to announce additional stimulus measures on 12 September. Accordingly, we continue to expect the Riksbank to delay or cancel plans to tighten monetary policy, awaiting more favorable conditions to bring the repo rate back to zero.” James Smith of ING added, “While we expect the Riksbank to retain its tightening bias, we suspect they will be forced to push back the timing of its next move again. For now we expect rates to remain on hold for the foreseeable future.” This view was somewhat shared by analysts at JPMorgan, who continue to forecast rates to rise only in July 2020.

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