News & analysis

The Riksbank hit a pause on policy tightening this morning, leaving the main policy rate at 4.00% in a move that defied consensus expectations that had looked for a final rate hike to be delivered.

As noted in our preview for today’s announcement, risks around today’s decision were finely balanced, especially given the unexpectedly fast cooling of September’s inflation numbers. That said, many including ourselves had thought that policymakers revealed preference for a stronger krona would just about tip the balance towards a hike. For now, though, a modestly stronger krona in recent weeks combined with weaker inflation data and slowing economic conditions have sufficed to see the Riksbank stand pat.

Given this dovish shift, we no longer look for a final hike from the Riksbank and expect rates to stay on hold over coming meetings, barring a reacceleration in price growth or sharp weakening in the krona.

The latter is yet to play out this morning, however, with the krona giving up just 0.5% to the euro post announcement in a somewhat muted response to the Riksbank’s surprise move.

At first glance, the key to today’s announcement appears to be the most recent set of inflation numbers, which showed price growth cooling faster than anticipated.

Notably, CPI for September stabilised at 6.5% YoY on the headline measure, with the MoM reading falling from 0.5% to 0.2%. On both counts this undershot expectations that had looked for a 6.6% and 0.4% increase in prices respectively. More significantly, the Riksbank’s preferred CPIF ex-energy measure of underlying inflation pressure continued to ease, falling sharply from 6.9% YoY to 6.1%. On top of this, the retreat of EURSEK from all-time highs has lessened imported inflation pressures, a notable factor in recent Riksbank decision making given policymakers highlighted sensitivity to krona weakness this year, with the recent fall in oil prices improving the forward looking outlook for inflation as well. Also significant has been the slowdown in domestic growth, with the only composite PMI print this year failing to print sub-50 occurring in July when the reading is distorted by seasonal factors.

Moreover, with conditions in the eurozone remain weak too, soft demand should further weigh on price pressures and may have seen the balance of risks tipped in the mind of policymakers.

Admittedly, the Riksbank has previously assessed a 40% chance that a final hike would be delivered, most likely at this meeting, suggesting a final rate hike was far from a done deal for policymakers, in spite of market opinion. Even so, of the 21 economists surveyed by Bloomberg, 13 looked for a hike heading into today’s decision with the remainder expecting a hold, with most analysts viewing the outcome as a coinflip. In particular, whilst the sell-off in EURSEK has clearly been welcome for policymakers, it has largely a function of external conditions, with easing rate expectations across the US and eurozone combining with a marginal pickup in eurozone growth signals both supporting the krona.

With risks these developments could reverse, it is a little surprising that policymakers did not take the opportunity to add a little interest rate carry insurance given the previously stated worries around imported inflation, making today’s decision something of a gamble in our view.

Even so, this latest meeting has seen the Riksbank update their krona forecast profile to reflect a stronger SEK in light of external developments, even as they keep projections for GDP and CPIF ex-energy unchanged. Indeed, with the Riksbank’s alternative scenarios focusing on the prospect of more immediate policy easing on this occasion, it would appear to signal a central bank that is looking to end rate hikes, assuming conditions continue to evolve as policymakers expect.

Whilst we see today’s decision to stand pat as a risk moving forward, barring an unexpected pickup in domestic inflation pressures or a sharp selloff in the krona, the Riksbank has now finished policy tightening in our view.

Author:
Nick Rees, FX Market Analyst

 

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