Riksbank Seen Holding the Line Against Global Easing Momentum

(Bloomberg) -- Riksbank Governor Stefan Ingves, who has likened the world's major central banks to elephants, is likely to ignore the growing momentum for easing emanating from Frankfurt and Washington, for now.

Ingves and his colleagues in Stockholm are seen keeping their benchmark rate unchanged at minus 0.25% as they meet this week. It's a close call whether they will maintain their forecast for a rate increase toward the end of the year.

They are facing growing pressure to ease monetary policy as growth cools and the European Central Bank and the U.S. Federal Reserve move toward adding stimulus. But Swedish inflation has been in line with the bank's forecast over the past two months, and the krona remains weak, giving policy makers leeway to avoid making any major adjustments to the forward guidance.

“When major central banks move in the opposite direction, that of course puts pressure on the Riksbank,” said Michael Grahn, chief economist at Danske Bank. “We're guessing that they may delay the rate hike by a quarter, or use very soft language. We don't think they'll flag for a potential rate cut.”

Riksbank board members have so far been reluctant to comment on whether the discussions of renewed easing from the Fed or ECB might derail their plans to raise rates. But Deputy Governor Per Jansson, the most dovish of the bank's six rate setters, sounded sanguine last month, saying there was as of yet “no need to panic in Sweden” with price growth and inflation expectations so far on target and a strong labor market.

While the krona has rallied since a near record low in May, it's still far from levels of a few years ago. Board members have recently emphasized that they can still meet their inflation target even with a stronger krona. Deputy governor Cecilia Skingsley said in May that “a considerable krona appreciation is not a problem” given that inflation is on the target.

Nevertheless, challenges are building as the economy loses momentum. Recent economic reports have showed retail sales posted their biggest decline since 2011 in May and confidence levels sank to the lowest level in six years in June. The strong growth in employment has also stalled.

The bank is seen keeping its benchmark rate at minus 0.25%, according to all 26 economists surveyed by Bloomberg. An investor survey by SEB AB showed it was about 50-50 on whether it would on Wednesday lower its rate path or keep it intact.

Svenska Handelsbanken AB anticipates that the Riksbank will remove the potential of an October hike but keep indicating a tightening at the end of the year or early next year.

“ECB and Fed of course affect the Riksbank, but what matters even more is the outlook for growth and inflation, and the Riksbank has the possibility to await more information,” said Christina Nyman, chief economist at Handelsbanken. “The krona has weakened quite a lot, so that they now would act in order to stop the krona from strengthening is not in the cards.”

Even so, they will eventually have to cave and can be expected keep rates on hold at least until the end of 2021, said Nyman, who's the former deputy head of the Riksbank's monetary policy department.

Others are taking an even gloomier view of the troubles facing the bank. Nordea Bank AB's 52-year-old chief analyst Torbjorn Isaksson said that he's beginning to doubt whether the Riksbank will hike again before he retires.

But two other Nordic banks disagree. SEB AB sees 60% likelihood of an unchanged rate path in July. Swedbank AB also believes in an unchanged rate path.

“Fundamentals since April speak in favor of keeping the rate path unchanged,” said Andreas Wallstrom, head of forecasting at Swedbank. “Domestic developments have been largely in line and the krona isn't strong, despite the repricing of other central banks.”

--With assistance from Harumi Ichikura.

To contact the reporter on this story: Amanda Billner in Stockholm at abillner@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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