fundamental alert

Sweden's Riksbank Meets Ahead of Schedule to Cut 175bp and Shifts Policy Outlook

Thursday, 04 December 2008 07:34:51 GMT  |  DailyFX Research

Today's Riksbank rate announcement was moved forward from December 17. The central bank gave no reason for the date change but the move by the Riksbank's suggests that the central bank is eager to cut rates. A potential aggressive cut would coincide with similar moves from the ECB and BoE today. We have revised our rate outlook and now look for a one percentage point rate cut to 2.75%, which is in line with the Bloomberg snap poll this week. The Riksbank should also revise down its growth and rate projections. We expect further sharp rate cuts ahead and look for the repo rate to bottom at 1.50% next year.

The Riksbank slashed the repo rate by a massive 175bp to 2.00%, far more than the market median estimate for a 100bp rate cut as well as the 125bp cut priced in the markets. The aggressive move will also raise the stakes ahead of the BoE and ECB rate announcements later today. The central bank signals that this is its last cut, with its rate path outlook having the repo rate bottoming at 2.00% and sees a repo rate of 2.5% in Q4 of 2010 and of 3.2% in 2011. However, we see the risk for the Riskbank yet again having to revise down its rate estimate and cut rates further to 1.50% next year. The central bank also revised down its growth estimates to 2.2% and -0.5% for 2008 and 2009 respectively, versus 1.2% and 0.1% in October, while 2008 and 2009 CPI is now estimated at 1.2% next year, compared to a 2.1% estimate in October.

Meanwhile, the SEK headed lower after the Riksbank rate move, which saw the repo rate slashed by 175bp to 2.00%. The move was a shock to the market, which was pricing in a move up to 125bp, although the consensus had been for a 1% move. EUR-SEK moved up to 10.5290 highs versus 10.4500 ahead of the announcement, which increases the risk of a challenge of the 10.6900 top recorded in November. Equity markets and the churn in the risk profile should drive price action, while the risk of further rate cuts ahead should also encourage further SEK selling on rallies. EUR-SEK bids are noted below 10.4000 and in to the 10.3500 region in the very near-term.

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