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Riksbank keeps monetary policy on hold in December, likely to hike in October 2018

The Riksbank kept its monetary policy on hold today as expected. The repo rate continues to be at -0.5 percent and the QE program will end at the turn of the year. Also, the repo rate path was untouched, indicating towards a first rate hike in mid-2018.

The Governing Board was unanimous in its rate decisions, but Flodén and Ohlsson entered reservations against starting to re-invest already in January 2018, noted Nordea Bank in a research report.

The central bank made some revisions to the macro economic outlook. The inflation projection was slightly revised, with the CPIF-inflation expected to average 2 percent in 2018 and in 2019. Core inflation is expected to come in at 1.9 percent next year and 2 percent in 2019. Meanwhile, the economic growth was downwardly revised a bit for next year and 2019 to 3 percent and 1.7 percent, respectively. This was partially because of lower housing investments. The macroeconomic revisions were pretty much consistent with expectations.

Inflation has peaked most likely and is expected to decline going forward, stated Nordea Bank. Underlying inflation is expected to undershoot the inflation target in 2018 and 2019. A shift in policy stance by the Riksbank might strengthen the declining in inflation trend through a stronger SEK and the Riksbank also continues to say that “It is also important that the krona does not appreciate too quickly”. The central bank has invested a lot in efforts to gain credibility for the inflation target over the past few years and it is thus hard to see the central bank jeopardizing this by turning hawkish at this point, stated Nordea Bank.

“We stick to our forecast of a first rate increase in October 2018 and two additional hikes in 2019, leaving the repo rate at 0.25 percent at the end of 2019”, added Nordea Bank.

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