Reading The FX Markets: Sweden

• The Riksbank distances itself more clearly from the inflation target – now conditioning the repo rate path on developments in household indebtedness.

• Nevertheless, the labour market will be important to follow going forward.

• The Riksbank’s explicit focus on debt to income ratio will give additional support to our view that supply of covered bonds will be very muted

Riksbank now conditions the repo rate on household debt

The Riksbank's decision to keep the repo rate unchanged today had only a moderate market impact. Short Riba, FRA s and SGB1041 sold off a couple of points on the news. Market pricing before the announcement gave about 40% probability of a cut, while only three out of 19 analysts expected a cut after Governor Ingves’ message last week.

The Riksbank signals that a rate cut may come in December, "it is now more likely that interest rates will be reduced than increased during the winter." The Riksbank's repo rate was lowered, but it can be noted that the “lower path” actually refers to a less steep increase over the coming years than in the previous forecast. Hence, the Riksbank means to say that a possible. decrease in December may be the last. Our own assessment is that the Riksbank will lower interest rates in December and that it may very well cut further later on, perhaps down to the levels Ekholm and Svensson signal, i.e. 0.75% and 0.5%, respectively. But of course that requires that the Swedish economy continues to weaken.

The press release from the Riksbank contains what we perceive as a new message: it makes the repo rate more or less conditioned by the developments in household debt. It is difficult to understand the following passage in any other way: "The low repo rate path is expected to go hand in hand with households’ debt ratios not rising, but instead remaining at the current level." Can it be said more clearly that the Riksbank is now moving away” from the inflation target and instead "weighting up" the importance of "financial stability and "macro-economic prudentiality"(in the form of household debt) when setting the forecast for the repo rate path?

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