The Riksbank left its key repo rate on hold at 0% Thursday, as widely expected. But to the disappointment of more hawkish observers, the central bank only modestly adjusted its forward guidance on interest rates. It now pencils in an interest rate hike sometime in the second quarter rather than the final quarter of 2024.
Furthermore, the central bank stopped short of announcing an end to asset purchases, opting instead to purchase 37-billion-krona worth of bonds in the second half of 2022 to offset maturing assets. Many had expected at least an announcement on ending treasury bond purchases.
A Close Vote
Still, Thursday’s decision was a close one. Riksbank deputy governors Bremand, Floden, and Olsen all voted against the decision in preference of less asset purchase which would lead to gradually tapering over the second half of this year. Governor Stefan Ingves, for the first time since 2008, cast the deciding vote against tapering.
Out of Place?
The Riksbank’s main argument for not hiking is that most of the inflation in Sweden is coming from higher energy prices rather than from the strength of Sweden’s underlying economy. Yet Thursday’s decision makes the Riksbank one of the most dovish developed central banks, particularly in comparison with Bank of England, Fed, and even the ECB.
Looking ahead, given Thursday’s voting pattern, the pace of global inflation, and monetary tightening elsewhere, expect the Riksbank to move gradually more hawkish as the year progresses.
EUR/SEK - Technical View
The impact of Thursday’s decision was unequivocally positive for EUR/SEK, as traders were anticipating a more hawkish Riksbank. EUR/SEK spiked higher in reaction to the decision, reaching a high of 10.53380 before higher-than-expected US CPI print propelled it higher later in the day.
Big picture, however, the pair has for the most part been confined to a range of 10.11000 and 10.70815 since May last year. Expectations of a more hawkish Riksbank may be just enough to prevent an upward breakout of that range.
