Some relief for Sweden's Riksbank but easing not over yet

The Riksbank cut the repo rate by 10 bps at their July meeting, moving deeper into negative territory to -0.35% and expanding the bond purchase program as well by SEK 45bn. The rate path included the possibility of a further cut, but stronger than expected Q2 GDP, a rebound in July inflation from June's downside surprise, and improved confidence indicators all suggest that the Riksbank can afford to remain on hold in September. SEK remains relatively weak and will be welcomed by the Central Bank, so waiting for October or even December to ease further allows for further clarity on the ECB and the Fed, as well as on any lasting effects from the volatile China situation, especially since QE is already very aggressive relative to the ECB. The risk is that the Riksbank chooses to be pre-emptive in addressing spillovers from lower commodity prices which will lower inflation. In any event, inflation forecasts will very likely need to be adjusted lower. 

The Riksbank is clearly determined to keep SEK from appreciating too quickly, which would interfere with bringing inflation back up as Sweden heads into wage negotiations. The currency maintains its significant importance in the Bank's reaction function, so it would be unwise to count out a reaction to any sharp moves, and even an on hold decision in September would only delay further easing and not imply an end to the easing cycle.