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Sweden’s Riksbank keeps rates on hold. Signals rate hike by end of 2018

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Sweden’s central bank held its monetary policy meeting last week and as widely expected the policy makers at the central bank left the key interest rate unchanged at -0.50%. However, officials guided investors toward a possible rate hike at the end of the year.

Policy makers left interest rates unchanged with but with two dissenting votes which was seen to be hawkish by the central bank watchers and investors. The dissenting votes came from Deputy Governors Martin Flodén and Henry Ohlsson.

The Riksbank’s monetary policy meeting was expected to be uneventful but the central bank meeting outcome was seen to be more inclining to the hawkish side as officials prepare for a lift off in interest rates this year end.

Both dissenting voters argued for a steeper rate path suggesting that the first rate hike should come in September or in October. Governor Floden is a second dissenting vote compared to the previous meeting where there was just one dissenting vote from Governor Ohlsson.

Both members wanted to see the central bank hike rates by 25 basis to bring the key rate to -0.25%.

The dissenting members also voted against the monetary policy committee’s decision to extend its mandate for foreign exchange rate intervention. This mandate was aimed at weakening the krona and to stem its appreciation. However, this seemed less likely due to the significant weakening of the Swedish krona’s exchange rate already.

Some viewed that the central bank’s decision to extend its mandate to weaken the krona is likely to be become a permanent policy tool with the central bank officials.

The policy rate was unchanged at -0.50% including the rate path while the official statement indicated that interest rates will rise toward the end of the year. Speculation is rife that the first rate hike from Sweden’s Riksbank will occur either at the October or the December monetary policy meetings.

The central bank also published its forecasts at the last week’s meeting held on 3rd July. Policy makers revised headline inflation to 2.1% for 2018 and for the next year as well. This was an upward revision compared to the previous estimates from April’s forecast of an increase of 1.9% for 2018 and 2019.

However, economists view the core inflation rate to be the major determining indicator and this was left unchanged.

On GDP growth, the central bank revised down growth by 0.1 percentage points for both 2018 and 2019. The central bank also revised its estimate for potential GDP growth to 2.2% at last week’s meeting. This was an upward revision compared to the estimates of 2.0% given during the previous forecast period.

Investors viewed these revisions as the central bank changing its view on the underlying momentum of the Swedish economy. The potential for higher growth, based on the estimates indicates that policy makers are optimistic that Sweden’s GDP could rise faster than anticipated without triggering higher inflation.

Some viewed the forecasts to be as somewhat dovish based on the Riksbank’s estimates.

Investors went into the meeting expecting to see no major changes, but the toneof the central bank’s statement was seen to be somewhat hawkish. The Swedish krona was seen strengthening against the euro heading into the monetary policy meeting.

The rate path for short term rates was also seen rising slightly higher indicating that there was a higher probability that the central bank could deliver a rate hike by the end of this year.

Despite the hawkish undertones, there is a certain sense of skepticism in regards to the Riksbank’s forward guidance. With inflation expected to remain subdued and the potential for consumer prices to underperform and fall below the central bank’s forecasts, it is highly unlikely that the Riksbank could follow through with a rate hike.

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