Swedish Krona Plunges as Riksbank Signals More Easing to Come

  • Central bank now expects rates to stay lower for longer
  • Analysts eye possible December cut after rates held at -0.50%

Riksbank's Ingves Sees Policy Rate Lower If Needed

Sweden’s krona weakened to the lowest level since 2010 after the central bank signaled it’s prepared to extend bond purchases into next year and said that it will keep interest rates lower for longer in its quest to bring inflation back toward its target.

QuickTake Deflation

The Riksbank kept its benchmark repo rate at minus 0.5 percent, according to a statement released Thursday in Stockholm. The decision was forecast by 26 of the 27 analysts surveyed by Bloomberg. Riksbank Governor Stefan Ingves said rates won’t be raised until 2018 at the earliest and that the likelihood of a further rate cut has increased. The currency fell as much as 1.6 percent to 9.87 per euro, the lowest since May 2010.

Riksbank’s Ingves Sees Policy Rate Lower If Needed

Bloomberg

It was a “dovish on-hold decision” that indicated a “higher probability of a December cut,” Mats Hyden, an analyst at Nordea Bank AB, said in a note.

The Riksbank has become increasingly reluctant to add more stimulus after driving its policy rate deep below zero and unleashing a bond purchase program that will have soaked up more than 40 percent of the government bond market by the end of the year. The European Central Bank’s decision earlier this month not to expand asset purchases has also reduced pressure on the Riksbank to ease monetary policy further.

Robert Bergqvist, chief economist at SEB in Stockholm, said the Riksbank decision was in line with “some kind of consensus view between central banks that monetary policy has reached the end of the road.”

More Easing

Nordea’s chief analyst in Stockholm, Andreas Wallstrom, said he still expects more easing by the Riksbank, "including a rate cut” to minus 0.6 percent in December. “The government bond purchase program is forecast to be expanded by 30 billion kronor ($3.4 billion), equally distributed between government bonds and index-linked bonds,” Wallstrom said.

“The revised repo rate path delivers enough softness to keep the krona on the weak side,” said Knut Hallberg, an analyst at Swedbank AB in Stockholm. “It shows a bigger probability of a cut.”

Some analysts had predicted the Riksbank would announce more easing already on Thursday after inflation missed the bank’s forecasts by a wide margin last month. The annual inflation rate slowed to 1.2 percent in September after peaking at 1.6 percent at the start of the year.

The Riksbank also cut its inflation forecast for next year, from 1.8 percent to 1.4 percent, and for 2018, from 2.6 percent to 2.2 percent. It predicted that unemployment will average 6.7 percent next year, while economic growth will slow to 3.3 percent this year and 2 percent in 2017.

“I don’t really see the logic of making monetary policy more expansionary,” since the economy is doing well, Bergqvist said. Still, “it’s a good tactic that the Riksbank keeps the door open,” he said.

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