Darkening Swedish economic outlook clouds Riksbank rate-rise path

Traders will be keeping close tabs on Sweden’s Riksbank and its effects on the embattled krona when the central bank meets on Wednesday amid signs of slowing growth in the Nordic economy.

The krona has declined nearly 4 per cent against Europe’s single currency since the end of 2018, one of the worst starts to any year for the Swedish currency. It was recently trading at SKr10.4751, having started the year at SKr10.1147.

“The outlook has clearly taken a turn for the worse,” said Jonas Goltermann of ING, who expects little change from the central bank this week. The krona’s depreciation, which he said is in contrast to expectations from the Riksbank of a gradual appreciation, “is even more remarkable given the bounceback in risky asset prices globally during January, which would typically be associated with a stronger krona”, he said.

The Riksbank meets to decide on borrowing costs on Wednesday. Sweden’s central bank raised its main interest rate to minus 0.25 per cent, from minus 0.5 per cent, on December 20 — the first rise since 2011, a surprise decision that briefly lifted the krona. It said at the time that its next rise would “probably occur” in the second half of 2019.

Kerstin af Jochnick, the Riksbank’s first deputy governor, recently said that the economy is still strong but that the central bank will need to go slowly in terms of rate rises. “It’s a question of taking our foot off the gas — not applying the brakes,” she said in a speech to the Swedish Property Federation in late January.

Mr Goltermann of ING sees the Swedish krona weakening above SKr10.50 against the euro in the first quarter as Swedish data underperform and as expectations wane for a Riksbank rate increase in the second half of the year.

He said that while the Riksbank may not unleash a “major downgrade” to its forecasts this week, another dovish shift in April means any rise in the krona will be shortlived.

Falling house prices and a decline in new construction will affect growth: ING analysts expect 1.2 per cent Swedish economic growth in 2019 and 1.9 per cent in 2020.

The latest figures from Statistics Sweden showed that the economy had contracted 0.2 per cent in the third quarter from the previous three months. Annually, third-quarter GDP rose 1.6 per cent compared with the same period in 2017. Fourth-quarter figures are due on February 28.

“Given the slowing economy and darkening global outlook, it is hard to see the super-cautious Riksbank hiking rates any time soon,” adds ING analyst Mr Goltermann. “While [policymakers] may raise rates as planned towards the end of this year if the global economy improves, there is a growing risk that the December hike turns into a ‘one and done’ for this cycle.”

Domestic demand, which has been the most important driver of Swedish growth over the past three to four years, “is facing headwinds”, said Olle Holmgren of SEB.

“The slowdown in residential construction that has been predicted since the end of 2017 is now under way and will lower growth by 0.5 percentage points this year,” said Mr Holmgren. Another concern is household spending, which was weak in the second half of last year, partly explained by car sales, he added. Retail sales have slowed and declining consumer confidence is raising questions about consumer spending this year.

© Riksbank

Fundamentals for Swedish households however look reasonably strong, said Mr Holmgren. Incomes are rising, savings are high and home prices have stabilised while employment growth has “continued to surprise on the upside” but will gradually slow.

“We continue to expect the Riksbank to hike rates but we now only predict one rate hike in October this year and one next year,” said Mr Holmgren. “We think inflation will fall below the Riksbank’s target even though high electricity prices mean that [the consumer price index with a fixed interest rate] will be above 2 per cent a while longer,” said Mr Holmgren.

Sweden’s currency is not the only Nordic currency to be hit recently by weakening growth prospects. The Norwegian krone fell on Monday for the seventh consecutive day, hitting a one-month low as inflation levels unexpectedly cooled.

Norges Bank reiterated in December that the interest rate, raised in September to 0.75 per cent from 0.5 per cent, would probably be increased in March. The Norwegian central bank said that the rate of future increases may need to slow as declining oil prices, rising protectionism and political uncertainty had damped potential for growth.

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