Pound up 1.0%+ on Swedish Krona after Riskbank Drops Quantitative Easing Bombshell

- Krona weakens after bets rates would rise are confounded

- Riksbank see subdued growth and inflation lasting longer

- Swedish economy underperforms in Q1

The Swedish Krona weakened over a percent on Thursday after the Riksbank decided to hold the refinancing rate that it offers to banks unchanged at –0.25%, with a view to keeping the rates 'lower for longer', in line with sluggishly low growth and inflation.

The big development was however the announcement that it would push on with its programme of quantitative easing, with the Bank committing to buy up government debt in order to boost economic expansion.

"The Executive Board has also decided that the Riksbank will purchase government bonds for a nominal value of SEK 45 billion from July 2019 to December 2020," read a statement from the Bank. “This corresponds to around half of the principal payments and coupons that the Riksbank will receive from the bond portfolio during this period. The purchases will take place in order to maintain an appropriate level of holdings and the Riksbank’s presence in the market."

The Riksbank "delivered a shocker - a QE bond-buying program to begin in July," says Barbara Rockefeller at RTS Forex.

Pound-to-Krona surged over 1.1% to a high of 12.33 after the release as investors sold the crown after disappointment that the Riksbank was still cautious on hiking rates, despite being seen as one of the more likely banks in the G10 to raise them.

The rally appeared to have flipped the short-term trend for the GBP/SEK exchange rate higher and bias the pair to further gains, perhaps to a target at the key 12.45 March highs.

Though on hold for now, the Riksbank is expected to eventually raise the refinancing or ‘repo rate’ back into positive territory towards the end of the year or at the beginning of next year (2020). Increases are expected to occur at a somewhat slower pace compared with the assessment in February, however, and this is what surprised the market.

“The rate path was lowered, indicating a repo rate of -0.25% in Q3 2019 and 0.61% in Q4 2021. In the former rate path the corresponding projections were -0.11% and 0.98%,” says Kjersti Haugland, chief economist at Danske Bank.

The dovish adjustment in the forward guidance gained the approval of one observer, David Oxley, senior European Economist at Capital Economics, who thought the forward guidance could have gone even further at cooling hawkish market expectations.

“The dovish shift in the Riksbank’s policy stance is a step in the right direction. But with economic growth and core inflation set to remain subdued over the coming years, we still think that policymakers and investors are overestimating the potential for interest rate hikes in the future,” says Oxley who thinks rates won’t rise until 2022.

This could translate into further gains for GBP/SEK as the Swedish unit weakens.

As it is the Riksbank stated that policy rates would likely be raised late this year or early next year.

“The rate path indicates roughly 25-30% probability for a rate hike in October, 55-60% probability for a rate hike this year and 40-45% probability for a rate hike in February,” says Haugland.

The Swedish economy “ground to a halt in Q1,” says Oxley, who expects “headwinds from the cooling housing market and weak growth in the euro-zone to result in Swedish GDP growth slowing sharply in 2019 and to remain subdued further out.”

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