Riksbank to further delay rate hike – ING

James Smith, developed markets economist at ING, suggest that while they expect the Riksbank to retain its tightening bias, they suspect they will be forced to push back the timing of its next move again.

Key Quotes

“We see three key reasons why the planned rate hike from the Riksbank will probably be delayed further:

1. The Riksbank continues to expect wage growth to gradually accelerate through 2020 and 2021, on the back of rising productivity growth. But this will depend on the wage negotiations that will culminate in an agreement in spring next year – and there are some signals that this could produce a more subdued result. Inflation expectations have been slipping, including among labour organisations. There also downside risks to the central bank’s productivity assumptions.
2. The effects of the 2017 house price fall are still feeding through. The good news is that house prices have since stabilised, although we expect the effects of the earlier price decline to continue to weigh on household spending. Housing starts have slowed, although there is a clear risk of a sharper deceleration in the number of construction projects being commenced.  Don’t forget too that a majority of homeowners are on floating interest rates – and while the global plunge in market rates should give consumers a helping hand – it is a consideration if the Riksbank begins to raise interest rates. A future rise in mortgage rates, combined with the ongoing ripple effects from the earlier price decline, could pose risks for the domestic economy.”
3. Escalating trade tensions also pose a risk for Sweden’s relatively open economy. The Riksbank did acknowledge this in its latest statement, but its forecasts for the US and eurozone look too optimistic compared to ING projections. While our trade team ultimately expects that eurozone car tariffs will be avoided, it may not be until the second quarter of 2020 before a truce between the US and China emerges.”

“For now we expect rates to remain on hold for the foreseeable future.”