Riksbank likely to lower repo rate by 10bp in December

In the past couple of years Sweden GDP growth has been driven by domestic sectors thriving on the back of a long-standing property market boom and strong migration inflows. Although with some signs of improvement, the export-oriented manufacturing industry may not come backto its old vigour with recent signs of a weakening global business cycle. That said, employment has been growing steadily with a recent drop in the unemployment rate. 

The latter appears mainly to be the result of a sudden decline in labour force growth. Inflation in Sweden has been turning up this year on the back of a weaker SEK, still remaining at levels well below the Riksbank's target. The prospects for attaining it, however, are very slim as the positive SEK effect fades and the upcoming wage round appears to end in roughly unchanged wage agreements.

The Riksbank is expected to continue to be under pressure to add stimulus, as the Bank's 2016 inflation forecast quite unlikely and the SEK has a tendency to strengthen as soon as the Riksbank abstains from action, in turn posing a threat to the Riksbank. 

"Hence, the repo rate is expected to be lowered by 10bp (to -0.45%) in December if not before, a level we expect to mark the bottom. The current asset purchase programme runs through December, by the end of which the Riksbank will have purchased 135bn or close to 24% of the outstanding stock of nominal bonds. We expect the programme to be extended (probably another quarter) at the current pace", says Danske Bank.