Foggy Data to Postpone Riksbank’s Next Move: Decision Guide

(Bloomberg) -- Heightened uncertainty about inflation and unemployment data is set to give Swedish policy makers sufficient cover to postpone any key decisions at their first meeting of the year.

No changes are seen in the Riksbank’s benchmark interest rate, currently at zero, according to a Bloomberg survey of 19 analysts. The decision is due to be published Wednesday. The Swedish central bank is also expected to signal little change to its asset purchase program or future borrowing costs.

Like its peers, the Riksbank faces the challenge of interpreting monthly inflation data due to changing spending patterns under the Covid-19 pandemic. The Swedish central bank has an added problem as a result of changes to the methodology in labor force surveys, making it difficult to gauge how the labor market is doing, according to Andreas Wallstrom, Head of Forecasting at Swedbank. Another source of uncertainty lies in the speed of the country’s vaccination program in light of the delays affecting European Union procurements.

The Nordic region’s largest economy has weathered the pandemic better than most, even as it had to partially reverse its early anti-lockdown approach in the wake of the second wave of the virus. Riksbank Governor Stefan Ingves remains focused on buying assets to keep rates low and stabilize markets, in preference to rate cuts.

What Bloomberg Economics Says...

“The Riksbank will be forced to lift its near-term forecast for resource utilization after preliminary GDP figures showed Sweden eked out growth of 0.5% in 4Q. Still, with stricter containment measures abroad and at home, the central bank is likely to remain cautious about the outlook for 1H.”

-- Johanna Jeansson, Bloomberg economist

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Less Pressure

Less transparent data “eases the pressure on the Riksbank and also increases their room for maneuver - they won’t be held responsible if inflation becomes too low, but they also won’t have to act on higher inflation because it can be a matter of coincidences,” Wallstrom said. “This speaks in favor of inaction from the Riksbank for some time.”

Investors’ focus will be on details of the bank’s quantitative easing program for the second quarter and beyond. In November, the Riksbank surprised markets with a bigger-than-expected expansion of its asset purchase program, to 700 billion kronor ($83.5 billion). The bank is due to present updated economic forecasts, but its outlook for the first half of the year will probably be impacted by the recent restrictions designed to stem the spread of the more contagious variants of Covid-19.

The Riksbank was the first to exit negative interest rates, more than a year ago. But policy makers have in recent months highlighted the option of returning below zero, as inflation remains far from the central bank’s target. Still, a survey of Swedish fixed-income investors by SEB conducted last week showed “a relatively large shift” toward a strategy signaling expectations of rising borrowing costs.

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“Both growth and inflation have been higher than the Riksbank’s estimates, but the board is very likely to highlight that uncertainty is large and say that it stands ready to expand further if needed,” SEB analysts Olle Holmgren, Marcus Widen and Lina Fransson said in a research note. “We also see a very high probability that the board will repeat that the repo rate can be cut at a later stage if it is assessed to be an efficient measure.”

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