Articles
8 February 2021

Riksbank to stay cautious despite recent economic resilience

Despite a rise in Covid-19 cases and fresh restrictions, recent Swedish data has held up better than hoped. That means little need for fresh Riksbank stimulus, though we'd still expect a cautious tone. The central bank looks set to signal flat interest rates until at least 2024, but still, we expect the krona to strengthen gradually later this year

Restrictions tighten as Sweden continues to move away from herd immunity strategy

As Riksbank policymakers sit down to decide interest rates this week, they will note that quite a bit has changed since their last meeting in November.

Sweden has continued to tighten Covid-19 restrictions gradually, partially reversing its relatively laissez-faire approach. The government has stipulated that no more than eight people can meet in public, alcohol sales past 8pm have been banned, and travel into Sweden has been restricted. A more recent pandemic law puts limits on indoor capacity, with only one person per 10 square meters permitted.

The result has been a fairly noticeable decline in mobility, converging to levels seen in some other parts of Europe (those that haven't fully locked down).

Google mobility data aligns with most of Europe

Source: Macrobond
Macrobond

Trade and manufacturing rebound despite rising Covid cases

That said, the damage so far appears not to have been as bad as it could have been - and indeed the Riksbank's forecasts for the end of 2020 were generally exceeded. While the unemployment rate ticked higher again at the tail-end of last year, the number of new redundancies is much lower than last spring. In part, this reflects a strong rebound in manufacturing over the last few months, while the general recovery in world trade is reflected in a spike in non-domestic orders during the fourth quarter. The Swedbank manufacturing purchasing managers index (PMI) now lies at 62.4, a significant improvement from the lows of 37.2 in April last year.

All of that helped the economy to post a positive, albeit modest, fourth-quarter growth rate of 0.5% - above the Riksbank's expectations. Inflation looks set for a near-term spike, too.

Admittedly like the rest of Europe, the vaccine rollout has had a slow start - just over 3% of the population has had at least one dose, similar to the EU-wide average. But barring a major hit to global trade, the economy should continue its gradual recovery through 2021 as restrictions gradually lift.

Manufacturing and exports show a strong rebound from pandemic lows

Source: Macrobond
Macrobond

Riksbank to signal flat rates for a long time

In other words, there's very little sign that the Riksbank will shift its stance dramatically this week - though a cautious tone is likely.

The new interest rate projection will probably indicate no change before 2024, and it's worth remembering that the appetite to push rates into negative territory in the event of an adverse shock appears limited. On quantitative easing, the central bank has already expanded its programme to allow purchases to continue through to the end of 2021.

We are therefore unlikely to see any major changes here, although the Riksbank is expected to indicate how many government bonds it will purchases in the second quarter, and the question is whether there is a degree of frontloading of the total amount due to be bought in the remainder of this year.

SEK: Sticking to the EUR/SEK 10.10 gravity line for now

The Riksbank meeting this week should have a limited impact on Sweden's krona. With central banks globally becoming more concerned about overly strong domestic currencies, and leaning against this trend (Riksbank’s January decision to change the way it accumulates FX reserves provides a case in point), we think it unlikely that the central bank will deliver a hawkish surprise, as SEK strength would not be welcome.

Hence, although the economy did better than expected and CPI is likely to continue rising near term, this is unlikely to alter the Riksbank’s cautious stance. We expect SEK to continue trading around the EUR/SEK 10.10 gravity line and the absence of a hawkish bias suggests the EURSEK 10.00 level should not be tested this week.

Looking further ahead, SEK should restart its appreciation trend from 2Q onwards once the eurozone and Swedish economy start to recover, and cyclical currencies rebound. We expect EUR/SEK to move below the 10.00 level in 2Q this year.

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