Riksbank will have to tighten policy next year

Swedish inflation is set to rise sharply over the next year. As such, the Riksbank’s intention to loosen monetary policy further seems like a mistake and any additional interest rate cuts will have to be reversed before long. Ultimately, we expect the rise in inflation to lead the Riksbank to increase its repo rate sooner than market participants or consensus forecasts currently envisage. We disagree with the view that the Riksbank is unable to tighten policy due to the probable sharp appreciation of the krona. Rather, a strong rise in domestic inflation will offset the impact of lower import prices. Similarly, we do not think that a rate rise will trigger a downturn in consumer spending. Instead, there are reasons to think that households’ borrowing costs will not rise dramatically during the early stages of monetary policy tightening.