The Riksbank cut its main interest rate to -0.35%

Roger Josefsson, Chief Economist at Danske Bank, on Swedish economy and SEK

The Riksbank cut its main interest rate to -0.35%, since officials expressed worries that an unexpectedly strong SEK could hamper efforts to boost inflation through a weaker currency. Some economists are concerned about the effects of such low interest rates on the economy, which the Riksbank expects the GDP growth of 2.9 % in 2015. What effects on the economy do you expect to see? Do you anticipate another rate cut from until the end of this year?

Actually, we believe the Riksbank will cut rates by another 10 basis points in their late December 2015 meeting, and perhaps also to act on further stimuli. Talking about the effects from the current interest rate cut, it is hard to separate it from the recent QE decision. However, in case you look only on the standard monetary policy rules, the interest rate cuts will have an impact on growth and inflation in the long term even on the normal circumstances. On the other hand, as for the QE measures, I think we already can see the effect, especially in the Swedish Krona.

As the Swedish government has quite a small deficit in the govern finances, these massive interventions, alongside with large scale asset purchases will provoke the free flow of the government bonds. What happens in that environment is probably that for those, who are able to find yield, they search it someplace else. Therefore, we anticipate the mentioned QE measures to have the predominant effect, which will show up in the SEK, and we believe that we have already witnessed it this year. Also, this is one aspect for us of not expecting such a strong appreciation of the Krona in the near term, but rather in a longer run. That way it should result in the country’s exports being stimulated and hopefully, the import price deflation.

If we look at Sweden’s neighbors Denmark and Norway, where rates are also at record lows, the fears of a housing bubble are raising there. Rising house prices and household indebtedness may lead to reducing consumption and increasing saving levels, especially if uncertainty continues to loom in Europe. Do you believe a housing bubble can occur in Sweden in the long run?

There is a strong divergence amongst Swedish economies on the issue of existing housing bubble. We think there is indeed some cautious evaluation of the housing markets, where from the fundamental perspective more property prices are 20%-30% overvalued.

However, that could lead some to the conclusion that we expect the crash, or the bubble to burst in the near future. Nevertheless, the problem with the Swedish housing market is that we actually have extremely low supply level of real estate.
Hence, what happens is that we have already seen that during this crisis, with the drop in the house prices, we witness a lot of new buyers coming into the market. Therefore, every time we see tendencies of a drop in the market, we also see new buyers entering, due to the low housing supply. Thus, our forecast is that there is indeed an overvaluation of the housing market, but we actually expect it to deflate quite controlled due to the fact that there is such a low real estate supply.

What other factors will impact the behavior of the Swedish Krona in 2015?

Alongside with the Riksbank action, we can mention the ECB measures and fundamental factors that can significantly influence the SEK. If we are talking about the downside risks for the EUR/SEK, I would say the Riksbank is really keen on protecting the floor that is a safeguard the Krona does not appreciate to fast – on the one hand. On the other hand, limiting the upside in the EUR/SEK or the downside in the Krona itself.

We have the ECB program running that suggests the SEK is undervalued from the fundamental perspective, economical growth, the current account and so. I believe that the EUR/SEK is sort of a range-bound from now until the end of 2015, and the downside in the pair would have the upper hand if the market would decide. Nevertheless, we have the Riksbank trying to mitigate any downside pressure on the pair, in order to reach the desired inflation target.

What are your short-term and long-term forecasts for EUR/SEK and USD/SEK?

We anticipate the EUR/SEK to trade at 9.30 in the short-term, whilst we see the pair at 9 in one year. As for the USD/SEK, we believe the pair should reach 8.45 in one month and 8.20 in a longer-term.