MNI STATE OF PLAY: Data Boost Dims Riksbank Negative Rate Talk

Better than expected data in recent weeks will likely tilt the scales further away from a return to negative interest rates for the Riksbank, with policymakers set to leave the benchmark Repo Rate and bond buying plans unchanged when they meet this week as data exceeds expectations.

Having expanded and extended its asset purchase programme in November, increasing it by SEK200 billion to SEK700 billion with purchases set to continue through to the end of 2021, the Riksbank has ammunition in the tank for now and the latest collective rate projections showED the repo rate flatlining at zero percent through to the end of the forecast in Q4 2023.

The minutes from the November meeting showed that two members thought that the increase in the size and increased duration of the asset purchase programme was unjustified. There seems to be next to no chance of the Riksbank looking to increase the purchase envelope again in the near-term unless the economic outlook darkens and firmer data are likely to dampen discussion of a return to negative rates.

There had been talk among committee members of returning to a negative rate if conditions warranted it. Martin Floden argued in November that with lending rates already very low increasing QE was unlikely to have any significant effect and his colleague Per Jansson said at a recent press conference that the experience (of negative rates) in Sweden was positive.

RATE PROJECTIONS

The better data since November have suggested that the hit from the Covid pandemic is less than the Riksbank anticipated and it is very likely to push up its near-term growth and inflation forecasts, although it could well shy away from introducing a rate hike into its three-year forecasts in this Monetary Policy Report.

Still battling to get inflation back up to target and with Governor Stefan Ingves saying that policy may have to be reassessed if further krona appreciation adds to disinflationary pressure, the Riksbank is likely to be wary of fuelling expectations of a rate hike.

The recent data have shown the Swedish economy holding up better than many other advanced economies in the teeth of the Covid-19 storm. The latest data put the economic contraction for 2020 at 2.8%, better than the central bank's forecast of a 4% decline.

Subsequent purchasing managers indices have been positive with the Swedbank manufacturing purchasing managers index (PMI) coming in at 62.4, down from 64.7 in December but still well into expansionary territory.