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Riksbank Signals Commitment to Hikes, But at Slower Pace

EconomySep 05, 2019 04:42AM ET
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(Bloomberg) -- Sweden’s Riksbank is sticking with a plan to withdraw stimulus from the biggest Nordic economy, but acknowledged it will need to do so at a slower pace than previously signaled.

“As before, the interest rate is expected to be raised towards the end of the year or at the beginning of next year,” the bank said on Thursday. “However, low interest rates abroad and worsened sentiment mean that the interest rate is expected to be increased at a slower pace thereafter than in the previous forecast.”

The Stockholm-based Riksbank left its main interest rate at minus 0.25%, as expected. The krona jumped on the news, with many having expected policy makers to abandon altogether their plans to hike rates.

Knut Hallberg, an analyst at Swedbank, said the statement “was more hawkish than expected.”

Stefan Mellin, a senior analyst at Danske Bank, said that in light of the “worsened sentiment,” it’s now key that the Riksbank proceeds “cautiously with monetary policy. The economic prospects are based on the repo rate being raised at a slower rate in the period ahead than in the previous forecast.”

Policy makers in Sweden have kept markets guessing after showing they were ready to go against the monetary tide set by the world’s major central banks. The Riksbank raised its main rate in December, and has made clear it wants to return to positive rates as soon as possible.

But with a trade war between China and the U.S., the prospect of a messy British exit from the European Union and broader fears of a recession, many analysts have questioned the Riksbank’s tightening resolve.

Nordea, the biggest Nordic bank, said on Wednesday it thinks the Riksbank will need to cut its main rate to minus 0.5% before the end of 2019, with no prospect of a hike until late 2021. It says there’s now a risk Sweden’s economy will contract in the coming quarters, amid “weak” household spending and “falling investment.” Nordea also warned of “stagnant exports and lower employment.”

In its statement on Thursday, the Riksbank painted a bleak picture of the global outlook.

“GDP growth abroad, which has been strong for several years, has now slowed and is expected in the coming years to be approximately in line with a historical average. During the year, however, sentiment has worsened, due in part to the trade conflict between the United States and China and the uncertainty surrounding the United Kingdom’s exit from the EU.”

Martin Enlund, chief analyst at Nordea in Stockholm, noted that the Riksbank made “very modest revisions to the rate path in the near term, but massive revisions at the back end” equivalent to roughly 50 basis points lower than previously signaled in 2022, he said.

(Adds economist comment.)

Riksbank Signals Commitment to Hikes, But at Slower Pace

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