While the Riksbank maintained a very dovish tone today, the strength of the Swedish economy and rising inflationary pressures mean that the Bank will soon have to change its stance. We expect the repo rate to be increased by the end of this year. The Riksbank kept policy unchanged today, with the repo rate left at -0.5% and purchases of government bonds set to continue until June as planned. The accompanying statement was very dovish. It noted that “there is considerable political uncertainty abroad and the risks of setbacks have increased”. And the Bank continues to think that there is a “greater probability that the [repo] rate will be cut than that it will be raised in the near term”. In its new forecasts, the Bank nudged up its expectations for CPIF inflation in 2017, from 1.6% to 1.7% and also increased its forecast for GDP growth, from 2.4% to 2.5%. However, the Bank cut its forecast for CPIF inflation in 2018 from 1.9% to 1.8%. The cut to inflation in 2018 is presumably partly as a result of the recent appreciation of the krona, which on a trade-weighted basis is now 3% stronger than the Bank forecast in December. The Bank anticipates that the krona will continue to appreciate gradually from here.
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