Sweden’s Riksbank Seen Holding Record Stimulus Amid Krona Slide

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  • Twenty of 21 analysts predict bank will keep rates unchanged
  • Central bank also seen keeping QE program at same volume

Sweden’s central bank will hold off for now from adding more to its record stimulus as an unexpected weakening of the krona is giving it a helping hand in its struggle to spark inflation.

The Riksbank will keep the repo rate at a record low of minus 0.5 percent in an announcement set for Wednesday, according to 20 of 21 analysts surveyed by Bloomberg. It will also keep its bond purchasing volumes unchanged, according to all of Sweden’s five biggest banks, but three of those lenders predict the program will be extended at subsequent meetings later this year.

“The Riksbank isn’t in a hurry to deliver something new,” said Par Magnusson, chief rates strategist at Swedbank in Stockholm. “Had the krona been as strong as before the Brexit vote, they may have done something. But at the moment they’re happy with the way things have developed over the summer.”

Here are four reasons why Governor Stefan Ingves can afford to take it easy:

Headline inflation is edging toward the Riksbank’s 2 percent target while underlying inflation, the focus of attention at the central bank, is at 1.4 percent. Meanwhile, trend-adjusted unemployment has fallen to its lowest level in almost eight years, adding to inflationary pressures.

After months of appreciation, the trade-weighted krona has weakened, partly as a result of the U.K. vote to leave the European Union. That’s good news for the Riksbank, whose unprecedented efforts to boost inflation have revolved around avoiding excessive currency strength that could be the outcome from the European Central Bank’s stimulus.

While signs are emerging that the expansion is slowing, Sweden’s is one of Europe’s fastest growing economies, with gross domestic product rising an annual 3.1 percent in the second quarter.

Having already bought about a third of outstanding government bonds as part of its quantitative easing program, the Riksbank will want to keep some ammunition stocked in its arsenal for a rainy day.

What Next?

Analysts are betting on a more exciting Riksbank meeting in October or December, when policy makers could face renewed pressure to respond to the dovish signals coming out of the ECB (its next policy meeting takes place on Thursday, a day after the Riksbank’s).

According to Swedbank’s Magnusson, one likely scenario sees the Riksbank adding more stimulus through the purchase of mortgage or municipal bonds.