Riksbank Preview: September 2020 - Currency Comments the Focus

Currency Comments the Focus

• Tomorrow's Riksbank meeting is expected to be less eventful than the previous meeting in July when QE was extended until June 2021. In all of the previews that we have read through, the base case in each is that GDP forecasts are revised higher while the repo rate path is unchanged and left flat at 0% through the policy horizon (TD Securities see a risk of an increase to some of the repo rate projections in 2023). Along with the consensus we also expect no dissents (none of the previews we read flagged any risk of dissent).
• Negative rates are likely to be left on the table but arguments in the past have focused on negative rates being more effective when demand can be more easily stimulated. At present with Covid-19 continuing to weigh on confidence, negative rates are seen as less effective than they would be when a vaccine is available with QE and forward guidance seen as the primary tools at present. QE is seen to help more than negative rates as it helps contain volatility and illiquidity in financial markets which can become more systemic and feedback into fear in either other related markets or even if widespread enough can impact business and consumer confidence.
• The Riksbank's corporate bond and mortgage bond purchase programme is seen as much more controversial than the sovereign bond purchase programme and the level of criticism has been a lot more widespread than other central banks that have launched QE programmes over the previous few months. However, with purchases only actually beginning this month, it is unlikely there will be any near-term changes to the programme.
• Outside of the repo rate forecasts and any discussions surrounding negative rates, the main risks lay in any comments on the currency. Ingves has sounded unconcerned about the appreciation of the krona recently so it would be a surprise if the Riksbank changed its tone and flagged concerns over the strength of the currency. Indeed, if the Riksbank was that concerned with the level of the currency, it may even be concerned enough to put in a token chance of a rate cut in the repo rate forecasts rather than leaving them flat through 2023.