(Bloomberg) -- The Swedish central bank's escape from negative rates is looking harder to pull off as turmoil spreads following the British vote to leave the European Union.
Policy makers in Stockholm on Wednesday took a small step in recognizing the new risks by delaying a planned rate increase -- the first since 2011 -- to the second half of next year and predicting rates will remain below zero until mid-2018.
But to avoid an unwanted krona appreciation -- and the lower inflation that comes with it -- they may need to do a lot more when the bigger central banks start rolling out new stimulus to protect against a potential Brexit-induced economic slowdown in Europe.
“They can't go at a completely different pace than what the ECB and other central banks are doing if they don't want a significant krona strengthening,” said Michael Bostrom, chief analyst at Danske Bank in Stockholm. “The ECB will definitely not end its QE program in March when the Brexit negotiations have started. I think we will end up with no rate increases at all next year.”
While the krona has weakened in the wake of the Brexit vote, policy makers on Wednesday stuck to a forecast for a gradual strengthening of the currency as the Swedish economy outperforms its major trading partners. The bank predicts that the economy will expand 3.6 percent this year, compared with growth of below 2 percent in the euro area and in the U.S.
Deputy Governor Cecilia Skingsley acknowledges that the worst may yet to come following the Brexit vote and that the reactions of the krona are hard to predict.
“What we want to avoid is that it happens too quickly and in a way that jeopardizes the economic recovery or fulfilling the inflation target,” she said in an interview after a speech in Visby, Sweden. “That's something we would work actively to prevent in that case.”
The bank on Wednesday also extended a mandate “that facilitates a rapid intervention on the foreign exchange market” while holding the repo rate at a record low of minus 0.5 percent. It stuck to a prediction that its quantitative easing program will end in December of this year, long before the Brexit situation is likely resolved.
The U.K. vote to leave the EU has forced European policy makers to re-think the outlook for the global economy at a time when they are already struggling with weak growth. Speculation has grown that more stimulus will be needed from the policy makers in Frankfurt and that the Federal Reserve will delay further tightening.
For Par Magnusson, a senior strategist at Swedbank AB, it's clear that the Swedish central bank may be far from done in delivering more stimulus.
“There's an imminent risk that, firstly, inflation will be lower than the Riksbank thinks even after they cut forecasts,” Magnusson said. “Then they will start to sweat a bit and will probably have to take some other kind of measures. And then we have the same toolbox that we've had all along, namely more cuts, more QE or currency interventions.”
To contact the reporters on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net, Amanda Billner in Stockholm at abillner@bloomberg.net. To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Nick Rigillo
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