markets

Negative Rates Turn Three in Sweden as Riksbank Seeks Way Out

Updated on
  • All economists surveyed see unchanged rates this week
  • Nordea sees risk that rate increases could be delayed

Almost exactly three years ago Sweden’s central bank cut interest rates below zero and unleashed a bond buying program to jolt the economy out of deflation. The conjuring of new money to buy bonds has now ended, but the negative rates may be more resilient.

Sweden’s biggest bank, Nordea Bank AB, says it sees a “risk” that the Riksbank when it announces its next decision on Feb. 14 will push back its forecast for a rate increase in the middle of 2018 as sluggish wage growth threatens its inflation outlook.

“Looking ahead, we don’t expect any rate hikes at all in 2018, as we expect inflation to fall and not be high enough to warrant a rate hike,” said Torbjorn Isaksson, chief analyst at Nordea. “Good global trends are positive factors, but inflation and domestic growth are decisive trends for the Riksbank.”

Even so, Nordea is a bit of an outlier and most banks predict the Riksbank will follow through on its forecast to raise rates this year as stimulus is withdrawn globally. Swedish policy makers including Governor Stefan Ingves have been emphasizing that inflation is now at their target and economic growth is robust, saying they see no hindrance in tightening policy before the European Central Bank.

A survey by Bloomberg showed all 22 economists anticipate that the bank will hold its benchmark repo rate at minus 0.5 percent this week.

Differing Views

Sweden's banks differ in their forecasts on the Riksbank's repo rate increases

Source: Economic forecasts from the banks for Riksbank repo rate, end of each year

Here’s what the biggest Nordic banks say:

SEB AB: The main scenario is for an unchanged repo rate path, with 15 percent “probability” that rate increase is delayed by one quarter and a 5 percent chance that the probability for an increase already in July is “increased slightly.”

“We think that the board is content with the current market pricing and feels it has the time to wait for more information about inflation in the first quarter this year before becoming more specific regarding the exact timing of a first rate hike.”
- SEB economist Olle Holmgren  

Nordea: The “baseline scenario” for an unchanged rate path, although the end point will likely be raised to just below 0.9 percent since the path now covers the period up to the first quarter of 2021.

“The risks to our forecast ahead of next week’s announcement from the Riksbank are strongly tilted towards a downward adjustment of the interest rate path. The reason is an uncertain inflation outlook.”
-Torbjorn Isaksson, chief analyst

Danske Bank A/S: Expects monetary policy stance and communication to be relatively intact from December, with not much new information to go on and incoming data that have been in line with forecasts.

“That said, it does not necessarily mean that next week’s decision will be a non-event. We saw last week how EUR/SEK reacted markedly to the no-news on inflation from Stefan Ingves.”
- Danske Bank Strategists Stefan Mellin and Marcus Soderberg

Svenska Handelsbanken AB: Expects “small changes” in Riksbank forecasts, with krona marginally stronger, inflation a tad lower and below forecast wage development. But small adjustments don’t necessarily mean that it will change its rate path.

"Our main scenario is that the Riksbank raises rates in September, which also corresponds to the rate path.”
-Johan Lof, Claes Mahlen, Christina Nyman and Kiran Sakaria 

Swedbank AB: The Riksbank will leave the rate path unchanged even as it revises down its near-term inflation forecast.

“We predict a first increase of 10 basis points in July. But inflation and krona developments will be key over the next months. The risk we think is most credible is that the bank delays its first increase until the fourth quarter.”
- Swedbank analysts Knut Hallberg and Ingrid Wallin Johansson 

DNB ASA: Policy rate and rate path to remain unchanged with bank sticking to its reinvestment plan of 20 billion kroner in both first and second half of 2018 and the same amount in first half of 2019

“The market seems to be pricing in a first rate hike either in September or October. Resource utilization is high and increasing and inflation is close to target. We therefore expect the first rate hike to come in September 2018, about six months before the first hike from the ECB and Norges Bank.”   
- DNB economist Jeanette Strom Fjaere

— With assistance by Josh Robinson

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