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Sweden: Rate Hikes Postponed• The Riksbank left the policy rate at 2.0% atits October meeting.Table 1: Riksbank’s Latest Forecasts (% y/y)2011 2012 2013 2014• The Bank cut its growth and inflationforecasts further, which paved the way for adownward revision to the repo rate profile.• Given the increased uncertainty about theeconomic outlook, we expect the Bank to keepits policy rate on hold for the rest of this year,and deliver a 25bp cut in Q1 2012.CPICPIFGDPRepo Rate (%,annual avg.)3.0(3.0)1.5(1.5)4.2(4.5)1.8(1.8)1.9(2.1)1.3(1.5)1.5(1.7)2.2(2.4)2.4(2.6)1.8(2.0)2.4(2.4)2.7(2.9)2.62.02.53.3The Riksbank kept its policy rate at 2.0% at itsOctober meeting, in line with our and the market’sexpectations.Source: The Riksbank. September 2011 forecasts in bracketsChart 1: Policy Rate (%)The rationale of the decision was that uncertaintyabout the economic outlook has increased mainlydue to the eurozone debt crisis, growth is expectedto be slightly weaker in the coming period andinflation pressures are low.The policy statement was broadly balanced. TheBank noted that so far the main impact ofdevelopments abroad on Sweden was via a declinein household and business confidence. Whenuncertainty declines and confidence returns, theeconomy is expected to grow at a more normal rate.On inflation, although underlying inflationary pressureis currently low, the Bank expects it to increase asresource utilisation rises.Riksbank’s forecast revisionsIn terms of economic forecasts, because recentevidence suggests economic growth is slowing, theBank revised down its GDP forecast from 4.5% to4.2% in 2011 and 1.7% to 1.5% in 2012. This, in turn,led to a downward revision in the inflation forecast.The Bank now expects 2012 headline inflation at1.9%, down from 2.1% previously (the 2013 inflationforecast was also revised down, from 2.6% to 2.4%).The CPIF inflation forecast for 2012, meanwhile, wasrevised down from 1.5% to 1.3% (2013 inflation wasalso revised lower, from 2.0% to 1.8%). There wereno changes to the Bank’s 2011 inflation forecasts.In all, these downward revisions have paved the wayfor a lower repo rate profile. The new profile suggeststhe Riksbank is to postpone continued increases inthe repo rate. The Bank’s forecast for the quarterlyaverage of the repo rate suggests it will average2.00% in Q4 this year and 2.34% in Q4 2012. This isdown from the Bank’s September forecast of 2.05%for Q4 2011 and 2.57% for Q4 2012. TheseSource: Reuters EcoWin Proprojections suggest the Bank intends to deliver thenext rate hike in Q2 next year.The decision to keep the repo rate unchanged wasnot unanimous. Deputy governors Ekholm andSvensson preferred to lower the repo rate by 25bp to1.75% and wanted to see a lower repo rate path thatstays at 1.5% from Q1 2012 through Q1 2013, andthen rises to just above 3% by end-2014.Policy outlookWe believe risks to the Riksbank’s policy profile areto the downside. The next move of the Bank will becut, rather than a hike, in our view. Over the comingperiod, the Riksbank’s focus is likely to shift to afurther loss of momentum in the economy, whichshould pave the way for further downward revisionsto the policy rate profile. Furthermore, the Bank willbe unwilling to deviate too much from otheradvanced country central banks in terms of policyrates, as a significant appreciation of the krona willput downside risks to inflation. Overall, we expect thepolicy rate to remain unchanged at 2.00% this year,before being cut to 1.75% in Q1 2012.Gizem Kara 27 October 2011Market Mover18www.GlobalMarkets.bnpparibas.com