Brexit, Italy Debt Bubble Threatening Riksbank Rate Hike Path


RIKSBANK RATE DECISION, OUTLOOK FOR MONETARY POLICY– TALKING POINTS

  • Swedish Krona oscillated before closing higher after Riksbank signaled rate hike
  • The central bank said it intends on tightening credit by end of 2019, or early 2020
  • Slower global growth, rising political risks in EU may undermine tightening cycle

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Surprisingly, the Swedish Krona did not fall after the Riksbank announced it will be holding the benchmark rate at -0.25 percent and provided gloomy commentary. Instead, SEK rose the central bank mentioned its intention of raising rates by either the end of this year or the beginning of 2020. However, markets do not appear to be entirely convinced of this – or even remotely for that matter.

Swedish Krona Crosses Jump on Prospect of Rate Hike

Chart Showing Swedish Krona

The official monetary policy statement outlined how risks from abroad are influencing the outlook and that the central bank will continue taking a cautious approach. Riksbank Governor Stefan Ingves reiterated his concern about European-based political risks such as Brexit and ballooning Italian debt. Both threats remain a headline concern as the continent struggles to stimulate growth and lift what looks like apathetic inflation.

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The Governor also stated that the central bank will adjust the sails of monetary policy in accordance to where the winds of inflation blow. He also said that the Riksbank closely follows what the ECB and Fed are doing which suggests the Nordic monetary authority will remain dovish. This would not be surprising considering that Sweden’s export-driven economy is sensitive to changes in global demand – particularly out of the EU.

Despite the Riksbank’s intention of raising rates, what is more likely to happen is policymakers will capitulate under the weight of fundamental risks and continue to delay rate hikes – and could even revert to cuts. In this regard, Sweden is in a very difficult spot. The repo rate already stands in negative territory, which means any stimulative measures may not have a profound impact because they are already at ultra-low levels.

Economic Forecasts Published Today Vs. April Estimates

Chart Showing Outlook for Sweden's Economy

Source: Riksbank (Numbers in parentheses are estimates from the April meeting).

However, not raising rates creates its own problems – and potentially systemic ones at that. Since the December meeting, Riksbank officials have repeatedly stressed the risk of rising household indebtedness that have developed over the years because the cost to borrow was so low. Debtors are vulnerable to changes in the economic conditions from higher interest rates and unemployment levels.

Policymakers are recommending macroprudential policies be implemented to address the issue before it develops into a crisis. What almost as surreal as a Dali painting is when policymakers said, “confidence among both households and companies indicates normal growth in the coming period.” The regional and global trajectory of PMIs suggests a possible disconnect between the perceived level of risk and the actual reality.

Chart Showing Global PMI, Eurozone PMI, China PMI

FX TRADING RESOURCES

— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter





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