ECB tilts the odds towards additional Riksbank easing by year-end

Last week's ECB policy meeting has important ramifications for future Riksbank policy. Given the expectations for a time-extension of ECB QE, followed by a likely deposit rate cut in 2016, an increased likelihood is seen that the Riksbank responds accordingly, easing policy further this year. This would most likely entail an additional 10bp cut in the repo rate, which could be announced in December (after the ECB's meeting), and an extension of the Riksbank's QE program by SEK40-50bn to Q1 2016. For this week's meeting (Wednesday), no changes are expected to the Riksbank's repo rate, currently at -0.35% (consensus: -0.35%, market pricing: 20% chance of a 10bp cut), but see increased risks that the Bank announces its QE extension. 

"The QE extension we are penciling will further expand the Riksbank's balance sheet, with SGB's purchases accounting for more than 4% of GDP", says Barclays.

Against this backdrop, the domestic outlook continues to look positive. Inflation has continued its modest uptrend helping stabilizing inflation expectations. Indeed, the Riksbank will continue to pencil a rapid uptrend in price inflation in its MPR. Yet, the SEK remains a key concern for the Riksbank and it will unlikely tolerate a sustained SEK appreciation in an environment of aggressive ECB easing. 

Indeed, a somewhat stronger SEK recently has tightened monetary conditions, which nonetheless remain rather easy according to historical standards. Modest EURSEK depreciation is expected, as Sweden's positive fundamentals will likely overshadow additional easing. Despite the Bank's reactivity to ECB easing, limited scope is seen for significantly more stimulus in the coming quarters. 

"We keep our EURSEK forecasts unchanged and expect any upticks in EURSEK to be sold", added Barclays.