Nordic & Swiss Economics

Hawkish Riksbank to reverse course in 2020

Nordic & Swiss Economics Update
Written by David Oxley

Having left its repo rate on hold at -0.25% this morning, we do not doubt the Riksbank’s clear intent to raise it to zero in December. However, with economic growth set to slow in 2020, and underlying price pressures to stay subdued, we think that policymakers will have to change tack next year.

  • Having left its repo rate on hold at -0.25% this morning, we do not doubt the Riksbank’s clear intent to raise it to zero in December. However, with economic growth set to slow in 2020, and underlying price pressures to stay subdued, we think that policymakers will have to change tack next year.
  • The decision by the Riksbank to leave policy unchanged today was pretty much a foregone conclusion, and the focus was always going to be more on what changes it made to its forecasts. It did not disappoint!
  • Far from delaying their forecast of a 25bp rate hike to the middle of next year, as we and many others had thought likely, the Riksbank instead doubled down on its view of an imminent rate hike. They said in no uncertain terms that the repo rate will “most probably be raised in December”, which caused the krona to jump by about 0.8% against the euro after the decision, although it has slipped back a bit since.
  • The Bank’s comparatively hawkish near-term stance is at odds with the weakness of the domestic economy and a global backdrop where major central banks are cutting rates. It appears that the Bank’s desire to get rates out of negative territory outweighs any expected boost from a further rate cut.
  • That said, the fact that the Bank cut its forecasts for the repo rate further out, and now projects it to stay at zero until well into 2022, injected a dose of realism to proceedings. (See Chart 1.)
  • Clearly, today’s message throws a spanner in the works for our previous view that the next move in rates will be down, and we have no reason to doubt the Bank’s intent to hike in December. However, underlying price pressures are set to stay subdued over the coming years, particularly given that capacity utilisation is falling. So the bigger picture is that pressure on policymakers to boost demand is still likely to build next year. With fiscal policy set to tighten, we suspect that the Riksbank will have to reverse course before long, and have pencilled in a rate cut, back to -0.25%, in mid-2020. (Again see Chart 1.)
  • Elsewhere, the Norges Bank’s decision to leave its key policy rate unchanged at 1.50% this morning was widely expected. Unlike its Swedish counterpart, the Norges Bank did not release updated forecasts today, and with no press conference scheduled, there is little new information to go on. The key point is that Norwegian policymakers assessed the outlook as “little changed” from that in September and repeated the message that the policy rate would “most likely remain at the present level in the coming period”.
  • Unsurprisingly, the Bank acknowledged the recent weakness of the krone, which sank to record lows against the euro and the dollar last week and noted that it “may result in higher inflation ahead”. But even though we think that the balance of risks is skewed towards further tightening, we are sticking to our forecast for the Norges Bank to leave its key policy rate on hold at 1.50% until 2022. (See Chart 2.)

Chart 1: Swedish Repo Rate (%)

Chart 2: Norwegian Key Policy Rate (%)

Sources: Refinitiv, Riksbank, Capital Economics

Sources: Refinitiv, Capital Economics


David Oxley, Senior Europe Economist, +44 20 7811 3906, david.oxley@capitaleconomics.com