Swedish Krona: Riksbank seen keeping hike option – Commerzbank

Commerzbank’s Antje Praefcke argues that despite currently low Swedish inflation readings, the Riksbank is likely to maintain its guidance that the policy rate could rise by year-end. She points to temporary tax measures and elevated energy prices as factors that could push inflation higher ahead, and expects elections to have limited near-term impact on the Swedish Krona.

Inflation risks keep hike chance alive

"Sweden’s August inflation data came as no surprise to the Riksbank at the start of the week. Following deviations from its forecasts in June and July, inflation in August was in line with its expectations (headline rate +0.3% yoy, core rate +0.7%); the market had anticipated marginally higher figures, but overall the rates remain low."

"The halving of the value-added tax on food is one of several temporary fiscal measures that will initially curb inflation and then allow it to rise again once the measure expires."

"However, energy prices - which have been elevated for several months now (with little prospect of a fundamental improvement in the situation at present, on the contrary) - will, on the one hand, cause inflation to rise directly and, on the other hand, indirectly drive up the prices of imported goods and other commodities."

"The Riksbank therefore expects inflation rates to rise, particularly starting in the spring of next year, which is why despite seemingly low rates at present it is likely to stick to its assessment that the policy rate could rise by the end of the year in order to address these price risks in a timely manner."

"A delay in the rate hike is conceivable, but unlikely given the conflict in the Middle East and high energy prices. However, only an unexpected departure from its restrictive stance, which we do not expect, is likely to put the krona under stronger depreciation pressure."

"Sunday’s parliamentary elections, on the other hand, are likely to have little impact on the krona. What will be important for the Riksbank is how fiscal policy will be shaped in the coming years, though this will not become clear for several months. In the run-up to the elections, the government was spendthrift, which in turn should be reflected in favorable growth prospects - another reason for the Riksbank to maintain, in two weeks, the possibility of an interest rate hike before the end of the year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)