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Swedish central bank holds rates and forecast, but signals risks abroad

Swedish central bank holds rates and forecast, but signals risks abroad
FILE PHOTO - The sign for Sweden's central bank is pictured in Stockholm, Sweden, August 12, 2016. REUTERS/Violette Goarant -
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Reuters Staff(Reuters)
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By Simon Johnson and Niklas Pollard

STOCKHOLM (Reuters) – Sweden’s central bank left its benchmark interest rate unchanged on Wednesday and said it still expected to tighten policy by early 2020, though it highlighted the global economic outlook as a risk to that forecast.

Analysts in a Reuters poll were unanimous in expecting the repo rate to stay at -0.25%, but several believed the Riksbank might shift to a more dovish forecast and the Swedish crown <EURSEK=> strengthened after the decision.

“We believed they would lower (the forecast),” Nordea economist Torbjorn Isaksson said.

“But we still think they are too optimistic about the inflation forecast and we believe they will lower the rate path a bit further ahead. The ECB and (U.S.) Federal Reserve will also put pressure on them as we see both …cutting rates.”

The Riksbank said little had changed since its April meeting, when it marginally pushed back the timing of its rate hike plans.

“However, the risks surrounding developments abroad can have a bearing on the prospects for Sweden, which emphasises the importance of proceeding cautiously with monetary policy,” the central bank said in a statement.

DILEMMA

A decade on from the financial crisis, Swedish rates are stuck in negative territory and rate-setters have stressed it is time to move toward normalising policy.

Economic growth has held up well and is only expected to slow slightly in 2019. Inflation, the major worry for the central bank, has been on target for the past two years.

But a trade conflict between Washington and Beijing is weighing on global growth, and uncertainties over Britain’s departure from the EU loom over an already weak European outlook.

Both the European Central Bank and the Fed have hinted at easing policy ahead, pressuring the Riksbank to adopt a dovish stance or risk a stronger crown and lower inflation.

“Weakening international growth indicators and signals of monetary policy easing from both the ECB and the Fed means that our forecast of a rate hike in July next year is becoming increasingly uncertain,” banking group SEB said in a note.

“Still, we think that the outlook has to deteriorate further before the Riksbank will shift to an easing bias and cut rates again.”

Sweden economy: http://tmsnrt.rs/2bylYpf

Sweden inflation: http://tmsnrt.rs/2eahojm

Riksbank rate, inflation and the Krona: http://tmsnrt.rs/1qEN4Rz

(Reporting by Stockholm Newsroom; editing by Niklas Pollard and John Stonestreet)

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