Swedish financial conditions to remain supportive throughout 2016-2017

In the past few quarters, financial conditions in Sweden have slowly become more expansionary. Most of the relaxation of monetary conditions is because of inflation picking up steam over the past year, according to Danske Bank. By summer 2016, this process is likely to be reversed; suggesting tightening of monetary policy in the forecast horizon, noted Danske Bank. Financial markets have majorly reacted to central banks’ measures and hints. In the past 12 months, short-term interest rates have been lowered mainly because of a steady flow of rise in the Riksbank’s policy stimuli. Not much change is anticipated in the near-term, added Danske Bank.

A stronger economic outlook in and outside of Sweden, along with rate hikes by the US Fed can pose a risk as that can make yields on longer-dated bonds increase, noted Danske Bank. This will be further highlighted by a likely rise in auction volumes of dated government bonds as Sweden’s public finances will be weighed on by demographic costs for several years, according to Danske Bank.

In past several years, public finances have slowly declined. However, this has underpinned the economy and assisted in rebounding economic conditions for consumers and firms. Hence, the structural general government deficit has risen and is at present more than 1% of GDP. It is likely to remain there for the rest of the forecast horizon, in spite of solid growth, added Danske Bank.

The SEK has bolstered in KIX terms on trend in the past 12 months, though under major volatility. The SEK is likely to continue appreciating in coming years, said Danske Bank.

“Domestic equity markets are expected to perform in line with historical experiences and should thus be able to rise by up to 10% and align to trend growth thereafter”, noted Danske Bank.

Overall, for a prolonged period, financial conditions have been stimulatory and are likely to continue being supportive through most of forecast period, according to Danske Bank.