Riksbank: Unexpected twist in repo path – Danske Bank

Danske Bank analysts suggest that as expected Riksbank lowered the terminal point of its repo rate path sharply, but sticked stubbornly to the view that it will start hiking rates around the turn of the year.

Key Quotes

“Riksbank has a more upbeat view on the economic outlook (still perceiving it as strong), despite some downward revision of the forecast. There is a small increase in the forecast for unemployment, something Riksbank appears to downplay when it comes to wage growth and inflation. Inflation forecasts are almost unchanged.”

“Our take: We simply cannot understand the rationale behind the sharp flattening of the repo rate path, it would have been more sensible to keep the steepness while postponing the path as the economy weakens. Still, in our view, this is a first step toward postponing rates hikes in coming meetings and eventually cutting the repo rate it in early 2020.”

“FX : EUR/SEK immediately dropped from 10.74 to 10.66 but at the time of writing the cross has recovered to around 10.69. The message was not as soft as we and market had expected and thus the drop makes perfect sense.

The decision today may be viewed as relatively hawkish compared to an ECB bazooka next week and thus temporarily weigh on EUR/SEK. We still think the next move is a cut and as such we continue to see EUR/SEK as a buy on dips, keeping 1M and 3M targets at 10.70 and 10.80. Technically, there is strong support around the 10.60 area.”