Above: Riksbank Governor Ingves gave markets a surprise at the February policy meeting (C) Pound Sterling Live 2015.
โGovernor Ingves highlighted that the Riksbank is far from its lower bound on rates, implying further rate cuts to follow.โ - Nikolaos Sgouropoulos at Barclays.
Swedenโs Riksbank announced it was to ease policy further at its February meeting, a move that came as a surprise to markets.
In the wake of the news the British pound to Swedish Krona exchange rate (GBP/SEK) was seen trading 1.67% higher than it was a day previously having reached 12.9895.
Sterling was given a further boost when the Bank of England delivered a hawkish Quarterly Inflation Report that suggested interest rate rises could take place in 2016.
As the below graphics show, the pound is back at its maximum levels, reached in 2009:
Above: GBP/SEK heads back towards historical norms. (C) Pound Sterling Live 2015.
Elsewhere, the SEK depreciated around 1.5% against both the EUR and the USD following the announcement.
โWe recommend staying long USDSEK, targeting 8.67, given our expectations for Fed tightening in Q2 2015 and the SEKโs attractiveness as a funding currency,โ says Nikolaos Sgouropoulos at Barclays following the announcement.
Acknowledging the soft domestic inflation outlook, poor economic activity abroad and heightened political uncertainty in the euro area, the Riksbank decided to ease policy further at its 12 February meeting, by cutting its repo rate to -0.10% and announcing quantitative easing through the purchase of SEK10bn government bonds.
The program will target government bonds with maturities of 1 to 5 years, of which there are currently SEK375bn outstanding.
The Riksbank expects the repo rate to remain in negative territory until Q3 2016, rising only modestly thereafter, as CPIF drifts towards its 2 percent target by mid-2016.
More Easing Forecast
From here, Barclaysโ economists think the probability of further easing is high.
โIn addition, we expect monetary policy to be significantly more responsive to economic and political developments in Europe as mounting political uncertainty abroad may negatively impact economic prospects domestically,โ says Sgouropoulos.
Indeed, during the press conference that followed the Riksbank meeting, Governor Ingves highlighted that the Riksbank is far from its lower bound on rates, โimplying further rate cuts to follow if the inflation outlook deteriorates further,โ says Sgouropoulos.
