Stockholm (Ekonamik) – At their October meetings, the Swedish and Norwegian central banks held their rates constant at -0.25% and 1.5%, respectively.
The two central banks are some of the more hawkish monetary policy institutions in the developed world at the moment. Riksbanken last cut rates in February 2016. On January 2019, Riksbanken increased the policy rate from – 0.5% to -0.25%. The last rate cut from Norges Bank took place in March 2016. In 2019, the Norwegian central bank has raised rates twice, from 0.75% to 1% in March, then to 1.25% in June and again by another 25bps in September.
Riksbanken Surprisingly Hawkish
“After several years of strong economic activity and inflation close to the target of 2 per cent, the Swedish economy is slowing down and the economic conditions are becoming more normal,” Riksbanken noted in its press release. “As before, the forecast indicates that the interest rate will most probably be raised in December to zero percent,” the Swedish central bank stated bluntly. “Uncertainty over the development of economic activity and inflation abroad and in Sweden is considerable, however. The forecast for the repo rate has therefore been revised downwards and indicates that the interest rate will be unchanged for a prolonged period after the expected rise in December.” According to the Riksbanken’s forecast for the repo rate from the September 2019 Monetary policy report, the rate is expected to rise at the end of 2019 Q4 and again at the end of 2020Q4.
“While saying at yesterday’s press conference that there is nothing inherently special about a zero bound, Stefan Ingves also mentioned that he is well aware the public may be having a hard time understanding today’s rates,” Swedbank Macro Research noted commenting on Riksbanken’s decision. “After a December hike, the repo rate is expected to hold steady at least until 2022.” Johan Löf, Senior Economist for Sweden at Handelsbanken Capital Markets, commented that the Riksbank was “surprisingly hawkish at October meeting amid worsening economic outlook.” The surprise was somewhat echoed by Nordea’s Torbjörn Isaksson who opined that the “Riksbank is still too optimistic on inflation, the labour market and the economy in general. But that is of less importance in the near term, as the bank sends unusually strong signals of a rate hike in December. The weak economy and low inflation will mean that there will be pressure on the Riksbank to cut rates next year. But a rate cut is nevertheless unlikely as the bank seems increasingly reluctant to have rates in negative territory.”
Norges Bank Weighs Economic Upturn against NOK Weakness
The upturn in the Norwegian economy is continuing broadly in line with expectations in September. Underlying inflation has been as projected. Global uncertainty persists, and interest rates abroad are very low. At the same time, the weak krone may result in higher inflation ahead. “The Executive Board’s current assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at the present level in the coming period,” says Governor Øystein Olsen.
“In our view, Norges Bank has reached the peak of the rising cycle for now; we maintain our view that the policy rate will remain unchanged at 1.50 percent for the foreseeable future,” commented Marius Gonsholt Hov, Senior Economist for Norway at Handelsbanken Capital Markets. Nordea focused on exchange rates. “Norges Bank wishes to wait until December – when the central bank’s economists will make the new rate path – and in the meantime continue to monitor the developments of NOK,” said Dane Cekov, Analyst at Nordea Markets Research. “If the current NOK weakness continues over the next couple of months, we should expect the rate path to be revised up in December.”