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Riksbank unlikely to hike before February 2019; sustained inflation uptrend could trigger a rate hike sooner

Sweden's Riksbank is set to decide policy rate at meeting on December 20th. At its October 26 meeting, the central bank maintained its policy rate at -0.50 percent and delayed making a decision on its government bond purchase program, which is set to conclude at the end of the year. Despite booming economy and inflation close to target, we expect the Riksbanken to stay pat and extend QE into 2018.

Inflation in Sweden has clearly moved towards the Riksbank's 2 percent inflation target, though the central bank's last policy statement expressed some concern that the recent upturn was partially due to temporary factors. Riksbanken is unlikely to respond to a small overshoot after several years where inflation has been below target.

Riksbanken has showed several times in the last few years that it is reluctant to deviate too much from European Central Bank’s (ECB) policy. The ECB chose to taper but continues its asset purchase program through next September. The only way Riksbanken will tighten policy significantly before the ECB is if inflation overshoots target and the central bank is convinced with the sustained inflation uptrend.

Further, policymakers have expressed concern about the krona strengthening too quickly. An abrupt end to the Riksbank asset purchase program could have the potential to reverse the multi-year slide in the krona against the euro, so the Riksbank may choose to follow ECB and extend its own program into next year.

Riksbank Deputy Governor Ohlsson said that while the bank could extend bond purchases further, he questions whether this would be desirable given that inflation during 2017 has been “very satisfactory”. The last QE extension was already controversial and Ohlsson is considered a hawk in the Riksbank camp.

"We expect Riksbanken to extend QE by 10 billion SEK in the first half of 2018 despite booming economy and inflation close to target. Riksbanken will probably announce this at the meeting 20 December, as the current program only runs until the end of December. We expect a first rate hike in February 2019, slightly before the ECB starts increasing rates," said DNB in a research note.

EUR/SEK was trading at 9.9565 at around 1150 GMT, up 0.12% on the day. The pair is on a gradual uptrend since September 2017. Technical studies suggest some consolidation at current levels. Trend reversal seen only on break below 100W SMA at 9.5405.

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