MNI RIKSBANK WATCH: 50 BP Cut Foreseen As Activity Runs Soft
MNI (LONDON) - With key activity data running soft, the Riksbank is expected to continue its rapid easing with a 50-basis-point cut in its policy rate to 2.75% at its November meeting.
September’s policy statement stated that the rate would likely be cut at both the November and December meetings and that a 50bp reduction. Governor Erik Thedeen told MNI at the time that while there was no single key piece of data they had in mind for deciding between 25 and 50bp but that they were concerned about the slow pace of the economic upturn and more confident about the subdued inflation outlook. (See MNI INTERVIEW: Inflation Confidence Key To Fast Cuts -Thedeen)
Since then, key activity data have been soft, notably the Riksbank's own Q4 business survey, published at end October.
This found that manufacturing businesses no longer anticipated any economic improvement in the near future, that exporters had seen a decline in new orders and that retail sector optimism had dipped since the spring while soft demand was putting downward pressure on selling prices. This across-the-board weakness will reinforce the Executive Board's concerns about the recovery and strengthen the case for 50bp.
Some factors point in the opposite direction. One is the krona, which has come under renewed pressure, having depreciated a couple of percentage points since the September meeting based on the real KIX exchange rate index.
The Swedish central bank will also be taking its decision against a backdrop of heightened political uncertainty ahead of the U.S. election.
Fast cuts are pulling its policy rate towards the neutral setting, whose level the Riksbank is reassessing in detailed work. Thedeen though told MNI that neutral was not a key guide to policy given the uncertainty over its calculation.
“We don't know if 2.25% is the neutral rate ... we will get back to it. It is not that important for the current rate policy whether the neutral rate is 2.25%, 2.5%, 2.75%," he said, adding that the RIksbank would have to test how the economy reacts as it is approached.
Nevertheless, a cut to 2.75% would touch the top end of that range of estimates and the central bank may find it does not have much further to go unless it wants to move into stimulative territory.