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Riksbank keeps repo rate on hold, hints at rate hike around end-2019

The Swedish central bank, Riksbank, kept the repo rate on hold at -0.25 percent, as was widely anticipated. The rate path was lowered, but the central bank continues to hint at a rate hike around the turn of the year. This was more hawkish than anticipated as the bank sticks to its plans of hiking rates around the turn of the year. However, the lower end point of the rate path suggests that the bank is in doubt about the longer-term outlook, noted Nordea Bank in a research report.

The central bank’s rate path suggests a 60 percent likelihood for a rate hike in December and a full hike in February 2019. The end-point of the rate path was slashed, though, to a mere 0.37 percent in the third quarter 2022. The focus is on the near term, which makes the interpretation of the bank’s message as hawkish. No changes to the QE programmes or system for policy rates were announced, as expected.

The central bank did not revise the GDP forecast much and still describes the economy as solid. The bank’s inflation forecast remains the same. The deceleration in the labor market is rather because of structural matching problems rather than lower demand for labor, according to the bank. The Riksbank is confident in the strength of inflation expectations and is not concerned about the downward trend in some surveys.

“All in all, the Riksbank is still far too optimistic on the economy. Obviously, our call of a rate cut already in December is at risk, but a rate cut is still on the cards, we think. We expect the Riksbank to change its monetary policy stance, although it may be a bit more gradually and slower than previously expected”, added Nordea Bank.

By Aditi Awati
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