Sweden Riksbank: Expect another small rate cut

Though modest, strengthening of SEK and recovery of both inflation and inflationary expectations, dampening expectations for furtherpolicy action from the Riksbank in July.

The current bond purchase program continues through September, but long-term yields have increased, perhaps reflecting liquidity concerns in the bond market and the move in German bund yields. Higher long-term yields and a stronger SEK, in spite of QE, run counter to the Riksbank's aims.

With reduced summer liquidity upon us, the pace of purchases will likely be adjusted to account for this. With this in mind and despite the encouraging inflation figures, the Riksbank might deliver a 10-15 bp cut in the repo rate at the July meeting to avoid excessive SEK strength andreinforce their focus on bringing inflation back to target, says Bank of America. 

The purchase program size will likely remain unchanged, but renewed emphasis is expected on further actions that the Riksbank can take.

The risks around under- rather than over-delivering from the Riksbank, and indeed rates markets are not pricing in a cut at time of writing. The Bank could choose to wait for more clarity on Greece and the ECB response, in which case SEK strengthening should be seen. 

If so, however, this will only delay easing to the September meeting, with the possibility of an inter-meeting cut if SEK strengthens significantly, threatening the momentum of improvement in the inflation outlook