Contrary to our expectations, Sweden's Riksbank cut the repo rate to -0.10 % and the fine-tuning deposit rate to -0.20%, restoring the corridor. There is no change to conditions for Riksbank weekly certificates (at the repo rate) used partially to withdraw excess. It also shifted the repo path down but retained the first hike in Q3 '16, as widely expected. The KIX FX forecast was adjusted to reflect the Swedish krona's depreciation (roughly 4% weaker than the previous forecast), while the new forecast still assumes a stronger SEK going forward.
It also decided to start purchasing government bonds for SEK10bn (QE). This will be done in maturities between one and five years. It stands prepared to do considerably more bond purchases and extend purchases to 10 years, further repo rate cuts, push the repo rate path further down and out and, not least, act in between regular meetings. As before, FX intervention appears to be at the bottom of the list.
The macroeconomic forecast surprisingly shows only small revisions given the steps taken today.
Apparently, the Riksbank is extremely worried about the risk that the inflation target loses its role as a nominal anchor for price and wage formation The gradual deviation of these from the targets is apparently a great worry and at the centre of attention as the expectation is that there will be spill-over effects on the upcoming 2016 wage negotiations.
Going forward, we focus on January CPI next week and the Prospera inflation survey on 11 March. We cannot exclude that weak outcomes on any of these occasions will keep the Riksbank from easing further.
In general, the Riksbank's decision today is bullish for Swedish government bonds and is likely to weigh on the SEK near term.
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