Riksbank May Surprise Complacent Traders Underpricing Risk

  • Economists predict key interest rate will remain at record low
  • Decision to extend bond-buying program would be a dovish move

Sweden’s central bank meeting this week has the potential to deliver a dovish surprise, even as the market consensus is for no change in policy.

The Riksbank will keep the key interest rate at a record-low minus 0.5 percent on Thursday, according to all 25 economists in a Bloomberg survey. Policy makers are expected to make no changes to the current bond-purchase program, which is set to expire in June, before the next monetary policy meeting. The most likely surprise would be a decision to extend the quantitative-easing plan.

Below is a compilation of strategists’ and asset managers’ views on surprise risks heading into the Riksbank’s meeting:

Nordea AB

  • Main risk around the meeting is an extension of the QE program, especially in index-linked bonds by about SEK10b for 2H 2017, analysts including Mats Hyden and Martin Enlund write in a note.
  • A lowering of the repo path cannot be ruled out on back of the low wage deal that may put downward pressure on the inflation forecast.
  • A reduced easing bias cannot be ruled out either, but there is little reason for the Riksbank to gamble with the SEK at this juncture.

Catella Fondförvaltning AB

  • Officials may continue the QE program, albeit at a smaller scale, as the last inflation print came in below their estimates, Thomas Elofsson, Portfolio Manager Fixed Income said. That would be a dovish surprise.
  • If the Riksbank doesn’t extend its bond-purchase program beyond June, then they have to announce it now and that could lead to a slightly stronger krona, even if it’s widely expected and almost fully priced in by the markets.

Storebrand Asset Management AS

  • Any announcement that QE won’t be extended beyond June is more or less priced in by markets, Andreas Halldahl, Head of Swedish Rates said in emailed comments.
  • Any extension would likely mean that they would have to consider buying other types of assets than government bonds.

Danske Bank A/S

  • The Riksbank will not extend the current QE program to avoid jeopardizing the functionality of the Swedish government-bond market, analyst Michael Bostrom writes in a note.
    • To balance this risk, expect Riksbank to flatten the rate path and to postpone the first rate hike by another quarter or two.
  • The potential market surprise would be an announcement of an extension of QE into 2H 2017.
  • The market discounts a complete end to QE by summer, asset-swap spreads are back to roughly the same level as prior to QE, especially in the 5Y SGB segment.

ING Groep NV

  • Should Riksbank officially announce that QE will end in June, then this should be SEK positive, but only modestly as this would not come as a complete surprise, strategist Petr Krpata said in emailed comments.
  • With the market now more closely looking at the theme of eventual ECB QE tapering, there is one less hurdle for the Riksbank to end QE in June.
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