Riksbank fights back – Rabobank

FXStreet (Guatemala) – Jane Foley, Senior Currency Strategist at Rabobank said that by cutting the repo rate by 50 bps this morning, the Riksbank went much further than the market had expected.

“It is clear that deflationary risks were the principal trigger for the move; in May the headline CPI rate printed -0.2% y/y, with the underlying rate only moderately better at +0.4% y/y”.

“That said, despite the near absence of inflationary pressures the market had expected the Riksbank to announce a more moderate 25 bp move today”.

“In its statement today the Riksbank commented that “global inflationary pressures are low and the forecasts for international policy rates have been revised downwards”. This implies that the aggressive nature of the ECB policy action last month and the warnings from ECB President Draghi that further policy action could yet be forthcoming played a part in the Riksbank decision to announce the large policy action this morning”.

“With many developed world authorities placing increased faith in macro-prudential measures to curtail risk taking, it seems that the era of low interest rates still has further to run. EUR/SEK sailed past our 3 mth target this morning, while we have revised this higher to 9.25 (from 9.22), we are wary of pushing it much higher on the risk that the ECB could extend its dovish tone”.
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