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Somebody Get Paul Krugman A Laptop: The ‘Sadomonetarists’ Are Making A Comeback In Sweden

Spoiler alert: it was a "dovish" hike.

Somebody get Paul Krugman a laptop – the “sadomonetarists” are at it again in Sweden.

That’s a reference to Paul’s cartoonish 2014 blog post in which he famously accused the Riksbank of being a bunch of prosperity-hating heretics for hiking rates in and around the European debt crisis.

Sweden, Krugman lamented, went from “rock star of the recovery” to “Japan”, and all thanks to “a classic case of sadomonetarism in action.”

Well, the “sadomonetarists” subsequently abandoned their sadomonetaristic tendencies on the way to NIRP. Fast forward seven years from the hikes Paul hated so much and four years from the blog post in which he declared that hatred, and the Riksbank has hiked rates. Here’s a chart that shows you how this story has unfolded – the lonely red highlight over on the right-hand side represents Thursday’s hike.

RiksbankHR

(Bloomberg)

The krona surged on the news, although further gains will probably be capped by the dovish spin the Riksbank put on the decision.

Krona

(Bloomberg)

Long story short, it looks like they’re hiking now because they know the window is closing and by most accounts, the rate path was more dovish than expected. Nordea says the next hike is probably “a long way off.”

“The inflation outlook is bleak and much suggests that growth will remain sluggish, which will be obvious by the autumn of 2019 when the Riksbank plans to hike rates again”, the bank says, adding that the next hike will likely come a year from now after/when the ECB starts to hike. That underscores the extent to which Swedish monetary policy isn’t entirely independent.

“Revisions to the Bank’s rate path were not small and the language around the timing of the next hike appears non-committal,” Barclays wrote in a quick note, before reiterating the point made above. “We expect the Riksbank to adopt a wait-and-see approach and take its cues on policy from the ECB”, the bank says. “We expect today’s SEK rally to prove short-lived as the Riksbank’s non-committal language is likely not enough for investors to meaningfully re-engage in long SEK positions.”

“With today’s decision we think the Riksbank will use the next six to nine months to assess if the domestic and global data are broadly developing in line with its base case forecast”, Goldman remarked, weighing in with a slightly more upbeat take on the prospects for further hikes as follows:

If so, we think the Riksbank will hike in Q3 and raise the repo rate about twice or slightly more over the subsequent year. We do see risks to our modal forecast as skewed to the downside, reflecting that we also attach downside risk to our forecast of an ECB hike by late 2019.

Ultimately, Sweden still has to worry about the housing market and, of course, the evolution of the broader macro picture which is now clouded by myriad uncertainties not the least of which are trade and Brexit.

So, it’s not entirely clear whether you can call today’s hike a “landmark” moment or even if you can characterize it as the start of a hiking cycle. I mean, what are they over there in Sweden, a bunch of sadomonetarists?


 

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