Riksbank is likely to lower rates again. Moreover, there is a risk of additional stimulus measures later in 2016. At the end of 2015, the sentiment was positive and there were indications that the monetary stimuli period was over. However, the positive sentiment was replaced by unrest in early 2016 with expectations of more central bank support. Volatility in stock market, doubts regarding the Chinese economy and drop in oil prices have urged the Bank of Japan to take measures and the European Central Bank to hint at more measures.

Meanwhile, the Riksbank continues to be baffled by inflation. According to the central bank's December meeting minutes, there are increasing concerns regarding the rise in inflation. Sweden's inflation in December was below expectations, while energy prices also continued to fall. The global economy is being impacted by low inflation. The spill-over to Sweden's inflation might be worsened by appreciation of krona, which the central bank intends to avoid.

During the December meeting no members highlighted that additional stimulus is required for the domestic economy. This suggests that currency intervention is a high likelihood.

"We consequently expect the Riksbank to do more. A rate cut by 10 bp to -0.45% is the most likely choice at next week's monetary policy meeting. The krona is quite simply not strong enough to warrant currency intervention", says Nordea Banks.

The new rate path of Riksbank will likely include a possibility of additional rate cut; however, this is unlikely to happen.

"We revise our forecast and now see the first rate hike in Q2 2017, with the repo rate being raised to zero in Q3 2017. Our previous forecast was rate hikes to zero in Q4 2016. Like previously we expect the repo rate to be zero by end-2017", says Nordea Banks.