Riksbank likely to keep monetary policy on hold in September

Trends in Sweden have been mainly consistent with the Swedish central bank’s forecasts from July. This implies that the Riksbank would keep its monetary policy on hold next week during its meeting, said Nordea Bank in a research note. The SEK exchange rate is weaker than anticipated, while the recent inflation print came in higher than the central bank’s projection. Also, labor market of Sweden is distinguished by bottlenecks.

The U.S. Fed is preparing for a rate hike, while global events have not deviated to a degree that would call for a shift in monetary policy. This mostly shows that the repo rate and asset purchase program would be kept on hold. Similarly, the interest rate path would likely remain intact from the July report, according to Nordea Bank.

However, there are certain dark clouds around the monetary policy horizon.  Governor Ingves said earlier this year that if the Swedish economy starts to decelerate when the policy rate is zero or negative, “this would entail a very difficult situation for monetary policy further ahead”. The Swedish economy has begun slowing down. The sluggish performance during the start of 2016 was followed by a subdued growth in the second quarter, noted Nordea Bank.

Unexpected decline in exports mainly led to weak growth figures. Indicators do not imply any improvement in the near term. There is a risk that decline would continue.

“In our view, the slowdown in H1 marked the onset of a period with more moderate growth in the Swedish economy”, added Nordea Bank.

Even if it appears unlikely that the Swedish central bank would sharply revise its GDP growth projection downwards, economic trends are still a matter of worry for the bank.