News & Analysis

The Riksbank delivers a hawkish rate cut, against our expectations but in line with market consensus. The move to lower the policy rate from 4.00% to 3.75% is the first Swedish rate cut since 2016, and leaves the Riksbank as just the second G10 central bank to ease policy this cycle.

That said, while the balance of risks ahead of today’s decision looked marginally tilted towards a hold in our eyes, we are not all that surprised to see the Executive Board choose to cut rates either. Like many, we felt the Riksbank was faced with a delicate balancing act between downside risks to the economy on one side, and the krona on the other. As such, the Executive Board has perhaps unsurprisingly chosen to accompany today’s decision to cut rates with some hawkish forward guidance relative to expectations, ruling out a June rate cut and indicating just two further rate cuts can be expected in the second half of the year.

For now at least, this has been sufficient to contain what could have been an explosive krona selloff.

While EURSEK is trading higher, the 0.4% rally for the pair is a relatively modest move, all things considered, an outcome we suspect will be greeted with some relief by Riksbank policymakers.

Whilst we were in a minority looking for a policy hold advance of today’s announcement, a view shared by 7 of the 20 economists surveyed by Bloomberg, we were in line with the board consensus across sell-side desks that this latest Riksbank’s decision was finely balanced. On the one hand, growth and inflation are tracking below the bank’s forecasts, while unemployment has risen faster than expected. On the other hand, the krona has weakened notably since the March meeting when the Bank’s most recent set of forecasts were published, which would mechanically lead to an increase in imported inflation if sustained over coming months, posing upside risks to price growth dynamics. This picture was broadly reflected in both the policy statement and monetary policy update too. For the Executive Board, however, a statement that “when inflation approaches the target while economic activity is weak, monetary policy can be eased”, suggests that the state of the domestic economy is now beginning to outweigh krona weakness in policymakers’ thinking, seemingly marking a moderation in the Bank’s prior exchange rate sensitivity.

Even so, we think policymakers are set to tread carefully moving forward, and have retained at least some of their concern over excess currency weakness. Significantly, today’s communications once again placed a notable emphasis on the upside risks to price growth, particularly from exchange rates, but also from geopolitical tensions.

Perhaps the biggest takeaway from today’s communications outside of the headline decision was the clarity of forward guidance offered by the Executive Board. The policy statement indicated that “the policy rate is expected to be cut two more times during the second half of the year, in line with the forecast in March”. All told, this was on the hawkish end of consensus expectations, which had looked for between 3 and 4 rate cuts this year. It was also more clear-cut guidance than we had expected. Not only does this rule out a June rate cut, it indicates a pace of one cut per quarter moving forwards, an outcome that removes a tail risk for markets that the Riksbank could end up easing much faster than either the ECB or the Fed. As such, while there had been a risk that a cut today could have triggered a notable krona selloff, markets are taking comfort from this forward guidance for now, with only a modest uptick in the krona following today’s announcement.

With this in mind, we are inclined to take today’s guidance at face value, and now expect EURSEK to tread water around 11.7 for the time being, before a combination of improving eurozone growth and ECB easing sees the krona appreciate on a sustained basis through the second half of this year.

 

Author: 
Nick Rees, FX Market Analyst

 

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