Brexit Crisis Seen Forcing Sweden to Keep Negative Rates Longer

  • Analysts are in consensus rates will be kept at minus 0.5%
  • U.K. Brexit could cool Swedish economic growth, inflation

June 23 changed everything. Sweden’s Riksbank, which had been preparing to raise rates next year, may have to scrap those plans after Britain left the European Union and sent markets into a tailspin.

QuickTake Negative Interest Rates

Economists at some of Scandinavia’s biggest banks say the central bank will use its July 6 policy announcement to delay its first rate increase. Though policy makers will probably keep the key repo rate at minus 0.5 percent, according to all 17 analysts surveyed by Bloomberg, the tone is bound to be more cautious.

Roger Josefsson, chief economist at Danske Bank in Stockholm, says there’s no point in expecting a rate increase before 2018 at the earliest. Brexit, as Britain’s vote to quit the EU has been dubbed, means lower Swedish inflation for longer, he said. Nordea, Scandinavia’s biggest bank, estimates Sweden may not be able to raise rates until 2019, according to Andreas Wallstroem, its chief analyst.

At Swedbank, analyst Knut Hallberg says Britain’s decision will force the Riksbank to cut its economic growth and inflation forecasts. He agrees with Josefsson that rates may not be raised until 2018, compared with the bank’s latest forecast for mid-2017.

Though Brexit delivered some instant stimulus to countries such as Sweden by triggering a selloff in their currencies, the broader fallout for trade could ultimately have a more profound impact on monetary policy. Sweden sells about three-quarters of its exports to Europe, and about 6 percent to the U.K.

Danske estimates that Britain’s departure from the EU will cut Swedish economic growth by 0.8 percentage point in a worst-case scenario. That will shave as much as 0.2 percentage point off inflation, depending on what kind of trade deal the U.K. reaches with the EU. Swedish inflation has hovered below the Riksbank’s 2 percent target for the better part of half a decade.

Most economists say the Riksbank probably won’t need to resort to further monetary measures, though Danske Bank does expect policy makers to announce an extension to Sweden’s quantitative easing program into mid-2017.

At SEB, the view is that the Riksbank probably won’t even delay its tightening plans. An analyst at the bank, Richard Falkenhall, says it’s “too early to judge what effects the new conditions will have.”

Ultimately, “it’s a crisis for the U.K., but a lot of investments and other things will move to Europe and Europe is much more important than the U.K.,” Josefsson at Danske said. “The effects on Sweden won’t be that big.”

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