Sweden: Riksbank leaves the repo rate unchanged in October but points to a December hike
October 24, 2019
At its 24 October monetary policy meeting, the Riksbank left the repo rate unchanged at minus 0.25%, as had been widely expected. Surprising market analysts, however, the Central Bank said the interest rate “will most probably be raised in December” to 0.00%, which is more hawkish than the remark given at its last monetary policy meeting in September, which pointed to a rate rise “towards the end of the year or at the beginning of next year”.
Inflation with a fixed interest rate (CPIF)—which is closely followed by the Riksbank—held steady in September at 1.3%, which is at the lower end of the Central Bank’s tolerance band of 1.0%–3.0%. However, despite this, the Central Bank expects CPIF inflation to pick up: According to its new forecasts, it is seen averaging 1.8% in 2020, which is up 0.1 percentage points from its previous forecast, and 1.8% again in 2021, which is unchanged from its previous forecast.
In terms of economic growth, the Riksbank lowered its 2020 forecast to 1.2% from 1.5%, and its 2021 forecast to 1.6% from 1.9%. Rather than letting a foreseen slowdown put it off raising the repo rate, though, the Riksbank said “the slowdown implies a normalization of an economic situation that has been strong for many years with high growth and favorable development on the labor market”.
As such, the Central Bank penciled in a repo rate rise to 0.00% in December. Looking further ahead, the Central Bank said the repo rate will likely be “unchanged for a prolonged period after the expected rise in December.”
Commenting on this monetary policy development, James Smith and Petr Krpata of ING said: “The Riksbank is sticking to its December rate hike amid a deteriorating economic backdrop, signaling a clear willingness to exit negative rates. Policymakers have said rates could fall again if the outlook worsens, but this latest guidance coupled with a more relaxed attitude towards the risk of SEK appreciation, suggests a high bar for easing.”
Author: Edward Gardner, Economist