SEK: Riksbank's Dilemma - To Hike or to Hold in a Precarious Balancing Act
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SEK: Riksbank at a crossroads
Today’s Riksbank rate announcement is as close to a 50/50 hike/hold decision as it can get. The Bank has been hugely focused on the krona’s levels recently, and the recent good performance of SEK has prompted markets to lean on the dovish side (70% implied probability of a hold). One major counterargument is that the recent SEK strength has been somewhat “artificial”, given it has been driven by some rather aggressive FX selling via hedging operations by the Riksbank itself.
On the inflation side, core and headline price pressures have abated faster than expected, although the CPIF excluding energy is still at 6.1% YoY, and the Prospera surveys suggested inflation expectations have remained quite sticky.
What we see as a major point in favour of a hike is timing. The Riksbank’s next policy meeting is in February, when the economic slack will have likely materialised more clearly in Sweden and abroad and it will be considerably harder to hike rates. If the intent is to provide more support to SEK, the Riksbank may take into account that FX sales (i.e. the “artificial” support to SEK) should terminate around the end of January/early February if the current weekly pace is sustained, and be encouraged to hike now rather than later, when economic conditions likely won’t allow it.
All in all, we are slightly leaning in favour of a rate hike today, even though we admit it is a very close call. A hold may be accompanied by an acceleration in quantitative tightening. The FX impact won’t just depend on the outcome, since there is a tangible risk of a split board, which could limit the upside potential for SEK in the event of a hike.
