Riksbank hikes key interest rate by 25 bps, likely to hike next in December 2019

The Swedish central bank hiked its key interest rate today. The Riksbank raised the interest rate by 25 basis points to -0.25 percent, the first tightening move since July 2011. The government bond reinvestment plan is left intact.

The central bank lowered the rate path by more than expectations. The rate path shows almost no likelihood at all for a rate hike in April, and the next full rate hike is in October 2019, according to the rate path, noted Nordea Bank in a research report. This is also consistent with the press release stating that “next rate rise will probably occur during the second half of 2019”. The end-point was lowered to 0.98 percent in the fourth quarter of 2021.

The growth projections for this year and next year was downwardly revised. The headline CPIF-inflation and CPIF ex energy was downwardly revised for months ahead. Overall, the Riksbank’s message today was slightly more dovish than anticipated as the rate path was adjusted downwards more than forecast.

Core inflation is expected to rise temporarily in the winter on the back of the soft SEK and higher food prices. However, the window for rate hikes is nevertheless closing for Riksbank, said Nordea Bank. The outlook for inflation is bleak and much implies that growth will stay sluggish, which would be obvious by the autumn of 2019 when the central bank plans to hike rates again.

“We thus expect the Riksbank to stay on hold for most of 2019. We see the next rate hike in December 2019 when the ECB takes a first move”, added Nordea Bank.