Today’s decision by the Riksbank to leave the key rate unchanged at 0.00% came as no surprise to markets. However, with the ECB already having shifted to team hawk and the next Riksbank meeting not for another 11 weeks, market participants had set their eyes on more hawkish guidance from the central bank. In the absence of this, the Swedish krona plunged to fresh session lows across the currency board.
EURSEK surges following the absence of hawkish guidance by the Riksbank
The data was not the only reason for the Riksbank turning more hawkish today: headline inflation largely overshot due to higher energy prices, while core inflation came in largely in line with the Riksbank’s November projections. However, markets expected that the hawkish repricing globally would lead to the Riksbank following suit. With the Bank of England having hiked already, the Fed looking set to begin hiking in March, and expectations of tighter policy for the ECB ramping up, this could have paved the way for the Riksbank to signal a reduction in QE reinvestments in Q2, which they didn’t.
Topping the dove call is the fact that the Riksbank only brought forward its repo rate path to indicate lift-off in the second half of 2024, while markets had expected a move in 2023.
Inflation projections have been revised upward but the central bank pushed back on this, noting in the rate statement that the high inflation is entirely explained by rapid increases in electricity and fuel prices, while the core print is closer to 2%. The statement also included that energy prices will not increase further this year, and that CPIF inflation will therefore fall back. Compared to other central banks across the DM space, this is arguably the most dovish statement regarding inflation, as both the Fed and the BoE have acknowledged that inflation is likely to be less transitory than initially expected, with the ECB emphasising upside risks to inflation too. The focus now turns to the press conference for hints as to whether Governor Ingves is set to take on a more hawkish pivot in April.
Ima Sammani, FX Market Analyst