Riksbank unlikely to cut rates in December, but may extend bond buying program

The Swedish central bank, Riksbank, is unlikely to lower its key interest rate next week, but is expected to extend the purchase program, according to a Nordea Bank research report. The central bank continues to struggle with too-low inflation. Therefore, the Riksbank is likely to give dovish signals.

The U.S. Fed, and to a certain extent the ECB, has hinted a less expansionary policy than anticipated. The Fed signals three rate rises in 2017, while the ECB would be running the printing press at a slightly slower pace. This is seen in the rising rates globally. Norges Bank also appears reluctant to lower rates as anticipated.

Even if it is uncertain as to the number of rate hikes that the Fed would actually deliver, it however alleviates the pressure on the Riksbank to take any action in the near term.  Higher than anticipated interest rates internationally lowers the risk of a sharp strengthening of the Swedish krona.

Commodity prices, which have increased recently, belong to the more “hawkish” factors, along with the decent global growth outlook. Sweden’s third quarter economic growth was consistent with the central bank’s projection, while indicators point towards a slight rebound in the future, said Nordea Bank.

Inflation continues to be a challenge for the central bank, and thus the Riksbank is expected to extend the bond buying program. In the October report, Riksbank revised down its inflation forecast. Through its rate path, it had hinted at a rate cut before its December meeting.

Since the October report, two prints of inflation have been released. Both readings were 0.1 percentage point lower than the central bank’s downward revised inflation forecast. The low prints underline how difficult it is to lift inflation and that the door is wide open for additional stimulus measures.

Overall, the Riksbank is highly likely to expand the purchase program, which would be expanded by SEK 15 billion in nominal government bonds and by equally in index-linked bonds in the first half of 2017, added Nordea Bank. The central bank is unlikely to cut its interest rate next year either.

“Our forecast for the SEK is unchanged. We see EUR/SEK at 9.60 and 9.40 in three and six months’ time, respectively”, stated Nordea Bank.