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Sweden is stuck in negative interest rates.
That's the view of fixed-income giant Pacific Investment Management Co, which is predicting that Sweden's central bank will need to leave its benchmark rate at minus 0.25% through 2020.
“It's clear that economic activity is decelerating,” said Peder Beck-Friis, a portfolio manager and economist in London at the California-based asset manager. “Inflation has been holding up reasonably well, but pretty much all of the other data have been weak. The one thing that most certainly will concern the Riksbank is the fall in inflation expectations.”
Sweden's central bank is struggling to exit more than four years of negative rates. A plan to raise rates to zero again toward the end is increasingly being questioned amid growing global economic turmoil. Like much of the rest of Europe, Sweden's entire yield curve is now below zero.
While not a base case, Pimco sees some probability that Sweden might enter a recession in the third quarter, given its close links with the weakening German economy. If the situation deteriorates further, the Riksbank's most likely next move could even be a cut.
Beck-Friis pointed to demographics and weak productivity growth among fundamental factors that are pushing down interest rates globally. While it's hard to influence that environment, more fiscal policy measures could offer a way out.
| Germany Readying Stimulus Plan as Contingency for Deep Recession Swedish Finance Minister Touts ‘Very Strong' Labor Market Pressure Is Building in Sweden to Cast Off Fiscal Restraints |
Sweden's Finance Minister Magdalena Andersson, who is presenting new economic forecasts on Thursday, has so far brushed off calls to unleash any major fiscal initiatives, or take advantage of the fact that Sweden can now borrow at negative rates into 20 years.
“It would certainly add value to the markets if they indicated that they are willing to expand their fiscal policy in case of a downturn,” Beck-Friis said.
Pimco is not holding any big active positions in the Swedish currency at present since there's “room for further depreciation in the short term” unless there's a clear pick up in global trade and in the global manufacturing cycle, he said.
To contact the reporter on this story: Rafaela Lindeberg in Stockholm at rlindeberg@bloomberg.net
To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net
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