Riksbank may cut repo rate by 10bps in October, likely to expand bond purchase program

The Swedish central bank, Riksbank, is likely to lower its repo rate by 10 basis points to -0.60 percent in the next week during its meeting, noted Nordea Bank in a research report. Furthermore, the government bond purchase program is expected to be expanded by SEK 30 billion, equally distributed between index-linked bonds and government bonds in the first half of 2017. This would bring the asset buying program to a total of SEK 275 billion by mid-2017, according to Nordea bank.

Lastly, the endpoint of the repo rate path might be lowered by the third quarter of 2019. The Riksbank is expected to cite the broken positive trend as the key reason for its decision, added Nordea Bank. Inflation this year moved lower gradually. Including energy, inflation is higher; however, CPIF inflation including energy has stagnated and there are signs that services inflation has peaked.

Meanwhile, imported inflation has been slowing in line with projections after the usual pattern in terms of lagged impacts of SEK rate movements. The weakening of krona in the summer and autumn is expected to temporarily restrict the drop in imported inflation, stated Nordea Bank. Thus, the central bank might have to maintain krona at weaker levels for longer than originally assumed to prevent inflation from declining further.

However, inflation is not the only concern of the central bank. The economic growth rate has begun decelerating in the first half of 2016 and there are no signs that growth would rebound in the second half of 2016. In particular, exports have lost momentum and this slowdown has a bearing on wage formation, stated Nordea Bank.

Moreover, domestic demand is also indicating signs of weakness. But, up till now employment has expanded at a stronger clip; however, the pace of rise is expected to decelerate in future along with the lower GDP growth.

The Riksbank is unlikely to ease its monetary policy in 2017 and is neither expected to tighten it. But in 2018, the repo rate might be raised to zero, added Nordea Bank. But there is a risk that it might take even longer for the repo rate to come out from its negative territory.