Riksbank keeps policy rate on hold, likely to expand bond purchase program in H1 2017

The Swedish central bank, Riksbank, kept its policy rate on hold at -0.5 percent during its meeting today, as was widely anticipated. However, the central bank’s message today seems dovish and is expected to ease further, including a rate cut, noted Nordea Bank in a research note. The repo rate path was lowered.

The Riksbank made no new announcements regarding the bond purchase program that ends this December; however, the bank did hint at its readiness to lengthen the program during its next monetary policy meeting. The Swedish central bank appears happy with the development of the SEK in recent months. The krona has trade considerably weaker than expected in September and therefore the Riksbank’s SEK forecast was altered accordingly, said Nordea Bank.

In spite of this, the inflation projection was downwardly revised notably for the next year and slightly for 2018. CPIF-inflation is projection to average 1.6 percent next year and 1.9 percent in 2018, as compared with the earlier projection of 1.9 percent in 2017 and 2.1 percent in 2018. The central bank expects core inflation to reach 1.4 percent next year and 2 percent in 2018. However, the inflation is unlikely to meet the target rate by the end of 2018, according to Nordea Bank.

The central bank kept its projection for GDP growth and labor market variables unchanged. Going forward, the Riksbank is expected to ease more.

“We expect a rate cut to -0.60 percent in December and an extension of the QE programme. The government bond purchase programme is forecast to be expanded by SEK 30bn, equally distributed between government bonds and index-linked bonds in H1 2017”, added Nordea Bank.