Riksbank: Big step in a dovish way - Rabobank

The Riksbank this morning took a big step in announcing the formal end of its QE policy, but did so in a very dovish way, according to Jane Foley, Senior FX Strategist at Rabobank.

Key Quotes

“The impact of the decision was offset by the news that the central bank will remain active in the bond market.  Due to the fact that large redemptions, amounting to around SEK 50 billion, will occur during the first half of 2019 and coupon payments totalling around SEK 15 billion from January 2018 to June 2019 are due, the Riksbank will retain a presence in the market to smooth activity.  Moreover, it announced that the reinvestments of these redemptions and coupon payments will begin as early as January 2018 and continue until the middle of 2019.  This means that the Riksbank's holdings of government bonds will increase temporarily in 2018 and the beginning of 2019, which is unusual for a central bank no longer formally engaged in a QE programme.”

“On interest rate the Riksbank repeated that rates could start to be raised from mid-2018. Last week Sweden’s November CPI inflation registered a stronger than expected 1.9% y/y, with the core rate rising to 2.0% y/y.  Today the Riksbank stated that “inflation has now been close to 2 per cent for some time”.  That said, it remains wary about the risk of disinflation.  It remarked that “it has required a great deal of support from monetary policy to bring up inflation and inflation expectations.  Economic activity needs to remain strong for inflation to continue to be close to the target. It is also important that the krona does not appreciate too quickly”.  The comments on the SEK vocalised a well-known concern for the Riksbank.”

“Sweden is a small, open economy and the value of EUR/SEK is of prime importance for its export sector.  In recent years the market has been wrong footed by the Riksbank when bouts of strong economic data have been followed by dovish rhetoric from the central bank.  The uptrend in EUR/SEK since September, however, should relax some of the Riksbank’s fears about currency strength and likely contributed to today’s decision to step away from QE.”

“Broadly speaking the economic backdrop in Sweden looks good. Earlier this month the Riksbank’s business survey reported that “economic activity has strengthened further during the summer and autumn and most Swedish companies are very satisfied with the prevailing situation”.  Swedish manufacturing companies were reported to be operating at “full throttle”.  The central bank’s survey did concede that “uncertainty on the housing market has increased”.  However, it concluded that “the major construction companies do not see any significant downturns in the demand for housing going forward”.  This relatively assured outlook on the housing market is in contrast to the view of some commentators.”

“After several years of buoyant growth Sweden’s housing market has finally started to cool.   There are concerns in the market that the Riksbank will need to adopt a softly, softly approach to any monetary tightening due to precariously high levels of consumer debt.  This will increase the sensitivity of the housing market to interest rate hikes.  The challenge for the Riksbank going forward will be to balance the inflationary risks stemming from shrinking capacity utilisation with the vulnerable and highly indebted consumer sector.  We see today’s cautious steps by the Riksbank away from extraordinary monetary policy setting as setting the scene for EUR/SEK to drift modestly lower potentially back to 9.80 on a 3 mth view.”