Sweden: The Riksbank holds fire in July; forward guidance unchanged
At its 2 July monetary policy meeting, the Riksbank left the repo rate unchanged at minus 0.25%, as had been widely expected by market analysts.
The Bank’s decision to stand pat was guided by well-anchored inflation expectations, with the Bank noting that current monetary conditions should support inflation remaining near the Bank’s 2.0% target for the foreseeable future. Inflation clocked in at 2.2% in May, coming in above target for the second month. The Bank marginally revised up its inflation forecasts for both 2019 and 2020, but cited no major revision in its stance. Economic activity in Sweden has been solid and the Bank assesses the economic outlook as favorable.
Regarding its forward guidance, the Riksbank continued to signal that it will likely hike rates by the end of the year or beginning of next. It also maintained its cautious rhetoric, citing international uncertainty as a risk to both GDP and inflation prospects. Particularly, the Bank highlighted that high household indebtedness makes Swedes more sensitive to changes in interest rates.
Against this backdrop, a majority of FocusEconomics panelists expect the Riksbank to hold the policy rate steady for the remainder of the year. Commenting on ING’s take on rate tightening, James Smith and Petr Krpata noted:
“This year’s bout of krona weakness and potential for further depreciation suggests the Riksbank won’t be too fazed by the prospect of ECB easing. […] we think this future tightening is unlikely to materialise – or at least not as soon as the central bank is currently projecting. Domestic demand is likely to remain fairly lacklustre, despite a slightly more solid spring housing market performance. The lagged impact of earlier property price declines is still translating into slower residential construction, while the fragility of the market is also weighing on consumer sentiment.”