Riksbank likely to stay on hold despite lower than expected inflation in September

Riksbank meeting is scheduled on Thursday, 27th October and analysts expect the central bank to keep rates and the Quantitative Easing (QE) unchanged. The probability of further action from Riksbanken has risen with lower than expected inflation. However, weakening of the SEK has likely given the Riksbank a bit of free space in the short term.

According to the latest Reuters poll, 3 of 16 analysts expect the Riksbank to announce an extension of bond buying this week and an additional 6 expect an announcement in December.

Low inflation is an ongoing concern for the Riksbank. The rate of inflation in September, measured by the CPIF policy variable (1.18 percent y/y) was 0.45 percentage points lower than the Riksbank’s forecast.  Sweden's unemployment continues to be extremely choppy, falling 0.5pp to 6.7 percent (sa) from August to September. Growth is still solid, but it is slowing.

That said, inflation is picking up slowly. With inflation and inflation expectations picking up, Riksbanken have come to the end of the easing cycle. Riksbanken will gradually become more relaxed about the value of the SEK and to a larger extent again emphasize their financial stability concerns.

"The probability of further action from Riksbanken (Thursday) has risen with lower than expected inflation. We however stick with expecting no change in rates nor purchases," said DNB Markets in a report.

There are a slew of data from Sweden due ahead of the Riskbank meeting. First out is the Producer price index due Tuesday, followed by trade balance on Wednesday, Consumer and Business Confidence index along with household credit growth on Thursday. Sweden posted the worst trade balance on record in the previous month and markets would be disappointed if it does not reveal a strong rebound.