Riksbank: Still bent on normalising policy – Rabobank

Jane Foley, senior FX strategist at Rabobank, notes that as per expectations, the Riksbank has confirmed steady policy this morning and the policymakers surprised the market by maintaining their hawkish outlook.

Key Quotes

“Despite widespread speculation that the ECB will soften monetary conditions as soon as next week, the Riksbank still appears to be bent on normalising policy.”

“According to the Riksbank the Swedish economy has entered a “calmer” phase after several years of high growth.”

“Given the slowdown in growth in the Eurozone and the contraction in German growth in Q2, there has been growing expectations in the market that the Riksbank would pare back its hawkish policy outlook at this morning’s meeting. That said, the Riksbank’s repo rate has been in negative territory for a prolonged period. This factor combined with the upward trajectory in EUR/SEK since 2016 is suggestive of an extremely soft set of monetary conditions.”

“A normalisation of interest rates should help prevent a worsening in this issue over time. That said, high levels of household debt also raises the sensitivity of households to a worsening in economic conditions such as a rise in unemployment or interest rates. For this reason, the Riksbank can be expected to act cautiously on policy changes and any rate hikes in the coming years are likely to be well signalled.”

“Whispers in the market that the Riksbank could follow the ECB with a possible rate cut by the end of the year have been firmly undermined by this morning’s policy statement. As it stands the Riksbank appears to be positioning itself for a rate hike potentially in December. Economic conditions between now and then will dictate whether policy makers will have the confidence to push ahead with this move, as with the performance of the SEK.”

“On the OECD’s measure of purchasing power parity, the SEK remains undervalued vs. the EUR by around 13.5%. While this would imply that EUR/SEK can rally further, our forecast of a loosening in monetary policy from the ECB next week combined with the risk of a Riksbank rate hike at the end of the year should be supportive for the SEK. We expect EUR/SEK to be trading in the 10.55/60 area by the middle of next year.”