We’re All Japan Now: Riksbank Edition

We’re All Japan Now: Riksbank Edition

“Way” back on February 19, we posted something cryptic about the Riksbank. It was called “You Can Forget About Another Hike From Sweden“.

I’m joking about the “cryptic” part. There was nothing at all ambiguous about that post, which was just as straightforward as its title suggests.

Earlier this year, the Riksbank decided to lean slightly hawkish against what was clearly a burgeoning, coordinated dovish pivot from global policymakers and also against weakening inflation. The rate path was unchanged at the February meeting, meaning a September hike was still possible and on top of that, the bank ditched the mandate that had allowed Stefan Ingves to intervene in the FX market (that mandate would have needed to be extended after expiring).

At the time, we suggested hawkishness was, at best, unwarranted and, at worst, potentially dangerous. Leaning against the dovish wind risked undermining inflation further and while the krona has been a notoriously poor performer thanks in no small part to the Riksbank’s monetary accommodation, adopting a hawkish lean in a world where “elephants” (as Ingves once described the ECB) like Draghi, Powell and Kuroda are shifting to a dovish stance, is precarious on the currency front – as laughable as a sharp krona rally might seem.

“Relying on exports for about half its economic output, Sweden has started to feel some of the weakness that’s gripped the euro zone and with the ECB forced into a more dovish position, policy makers in Stockholm have had little choice but to follow its retreat”, Bloomberg writes on Thursday, underscoring the point.

Read more

Dear Sweden: ‘Slightly Hawkish’ Doesn’t Work Right Now

Fast forward to April and, sure enough, the Riksbank (which hiked for the first time in seven years in December) pushed out the date for a hypothetical next hike to the end of this year or the start of next year and extended QE to the end of 2020.

“Rate increases thereafter are expected to occur at a somewhat slower pace”, the bank said, referencing the now-delayed, still-imaginary second hike of this tightening “cycle” (LOL).

The krona obviously plunged. The top pane below is the knee-jerk on Thursday in EURSEK and the bottom pane shows the currency hitting its lowest against the dollar since 2002.

The reaction across desks was pretty uniform. “The reduction in CPIF expectations and comment regarding the next hike being toward year-end or early next year has hit the krona hard”, CIBC said, adding “it seems that the prospect of an easier price background has allowed the bank to join those pushing back against monetary tightening”.

Yes, it does “seem” that way.

“[This is] very much more dovish than the market and we expected”, SEB noted. “They are more worried and are taking a clear step in a softer direction.”

Swedbank pushed out their forecast for the next rate hike to December from September and Handelsbanken says you can go ahead and forget about it altogether. “As we expect a weaker economic development, we expect no rate hike at all this year”, strategist Claes Mahlen said Thursday. “We change our main scenario from a final rate hike in September to no more hike in this cycle.”

Right. Not to put too fine a point on it, but that’s precisely what we said in February.

In a note called “Going Japanese”, Nordea describes the situation as follows:

Today’s message from the Riksbank was more dovish than expected but well in line with our long-held view that the Riksbank will stay on hold for long. The report underlines that inflation and inflation expectations remain the focal point for the bank. We see the next rate hike in mid-2020. Considering short term as well as long term challenges to lift inflation, the risk is that the Riksbank will stay on hold much longer than that.

The rate path was lowered more than expected. The rate path indicates no probability for a rate hike in September, and around 50% probability for a rate repo rate at 0.00% year-end 2019. It is also important that the end point of the rate path was slashed to 0.80% Q2 2022 (from 1.10% in Q1 2022 in the February report).

The Riksbank announced that it will continue to buy government bonds, roughly in line with our expectations. The Riksbank will buy 45bn between July 2019 and December 2020, SEK 40bn in nominal bonds and SEK 5bn in index-linked bonds. This corresponds to roughly a 50% pre-reinvestment of the 2020 redemptions including coupons during the period. The buying phase will be reduced from 20bn/6m to 15bn/6m.

The Riksbank lowered its inflation forecast, but less than expected and it is still above our view also in the near term

We’re all Japan now, apparently.

“Inflationary pressures are a little bit lower here and elsewhere as well and based on that and based on our judgement we concluded that it’s time for a rate hike toward the end of this year or early next year, and that’s a slight postponement compared to what we said before”, Ingves remarked in an interview Thursday, following the bank’s presser.

“[The] Swedish economy is doing quite well compared to other economies, so it would be very strange if we were to have a negative rate forever”, he continued, adding that “our interest rate path speaks its own language.”

Nothing further.



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