A weaker krona, above-expectation inflation readings, and a lack of scheduled meetings later this year, mean a 50bp rate hike from the Riksbank this Thursday looks highly likely. Any benefits for SEK may only show up at a later stage due to the current unstable risk enviornment.

Inflation concerns and a lack of future scheduled meetings point to a 50bp hike

The Riksbank's abrupt transformation from standout dove to hawk is almost complete. Having surprised markets with a 25 basis-point rate hike in April, policymakers are highly likely to step up the pace and hike interest rates by 50bp this week, for two key reasons:

Firstly, the simple fact is that the Riksbank holds fewer meetings each year than other central banks, and that means it has to make each one count. The ECB is poised to hike twice before Swedish policymakers meet again in September, and the Riksbank will want to get out in front – not least given the recent depreciation in the krona.

Secondly, the Riksbank laid out a few scenarios in April, one of which showed what would happen if core inflation came in above their central forecast at the time. Since then, recent core CPIF readings have come in higher than even this more hawkish scenario, which policymakers said at the time would justify a faster pace of tightening. Sweden is also building up to crucial wage negotiations early next year, and all the signs suggest a tight jobs market will yield a higher wage growth outcome than in previous years.

Core inflation has exceeded even the RIksbank's 'high inflation' scenario

Chart

Source: Macrobond, ING, Riksbank

A 50 basis-point hike seems very likely, and we could also feasibly see the Riksbank's new interest rate projection pencil in two further 50bp moves in September and November respectively. Policymakers will be aware that, despite roughly 100bp additional tightening being priced into the Swedish swaps curve since the April meeting, SEK is a little weaker than it was back then. However officials will need to balance this newly-found hawkishness against early signs of weakness in the housing market, where a little under half of new loans are on floating rates.

In short, a 50 basis-point hike at this meeting, and probably another in September, look likely. What comes thereafter is less certain, given growing concerns about global growth and our view that both the Fed and ECB will largely be done with tightening by the turn of the year.

FX: Krona's short-term outlook remains clouded

A more aggressive monetary tightening cycle by the Riksbank and a widening gap with the ECB is undoubtedly arguing for a weaker EUR/SEK. As shown below, the last time the 2-year swap spread between the EUR and SEK was this negative, EUR/SEK was trading around 8.50. 

EUR/SEK and swap spread differential

EURSEK

Source: ING, Refinitiv

Surely, the current market conditions are very unique, and EUR/SEK is, like many other currency pairs, being driven by many other factors outside of the simple policy rate differential. The environment for global equities is likely to remain challenging due to the combination of global slowdown fears and tighter monetary conditions, and the relatively illiquid (to other G10 FX) and high-beta krona should in our view struggle to stage a sustained rebound in the near term. 

We'll need to wait for a considerable stabilisation in global risk sentiment (that may only happen in 4Q) to see EUR/SEK re-connect with its rates differential, which unmistakenly argues for a weakening of the exchange rate. We still don't exclude a return to 10.10-10.20 by the end of this year, with the Riksbank's policy being a major driver of SEK restrengthening. 

Read the original analysis: Riksbank set to hike 50bp in a bid to get ahead of the ECB 

Content disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more here: https://think.ing.com/content-disclaimer/

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD pulls away from session highs, stays above 1.0200

EUR/USD pulls away from session highs, stays above 1.0200

EUR/USD has lost its bullish momentum during the American trading hours and started to edge lower toward 1.0200. With Wall Street's main indexes pushing lower after the opening bell, the greenback staged a rebound, causing the pair to turn south.

EUR/USD News

GBP/USD declines below 1.2100 following earlier rebound

GBP/USD declines below 1.2100 following earlier rebound

GBP/USD continues to erase the daily gains it recorded during the European session and trades below 1.2100. The negative shift witnessed in risk sentiment seems to be providing a boost to the safe-haven dollar, weighing on the pair.

GBP/USD News

Gold bulls to challenge $1,800 ahead of US inflation figures

Gold bulls to challenge $1,800 ahead of US inflation figures

Gold kept rallying on Tuesday, hitting a fresh one-month high. The greenback remained weak throughout the first half of the day, recovering some ground after Wall Street’s opening amid the poor tone of US indexes.

Gold News

Iran adopts crypto in foreign trade, debuts with $10 million import order

Iran adopts crypto in foreign trade, debuts with $10 million import order

In a watershed moment for crypto adoption, Iran registered its first official order for importing $10M worth of goods paid for in cryptocurrencies. A private Iranian news agency reported that the Ministry of Industry, Mine and Trade has plans to widely use cryptos in foreign trade.

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!

BECOME PREMIUM

Majors

Cryptocurrencies

Signatures