Norges Bank & Riksbank policy meetings in focus – MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the upcoming Norges Bank and Riksbank policy meetings will be in focus in the week ahead.

Key Quotes

“The Riksbank policy meeting has the potential to be more of a market moving event. Similar to the ECB, the Riksbank has to a make a decision soon on whether to extend their QE programme which is set to expire at the end of this year. The Riksbank can either make the decision at this week’s policy meeting or wait until their final meeting of the year on the 21st December. To avoid unwanted market volatility in less liquid year end markets, it would make more sense to announce plans for their QE programme this week.

The Riksbank has already started tapering their QE programme slowing the pace of purchases to SEK45 billion during the second half of this year although it has offered little support for the krona which has continued to weaken. The weaker krona is helping to ease monetary conditions in Sweden and the Riksbank remain wary of tightening policy too quickly which could trigger a sharp strengthening of the krona. The large inflation undershoot relative to the Riksbank’s expectations in September will also contribute to policy caution.

As a result, we expect the Riksbank to extend QE purchases by a further six months although the pace of purchases is likely to slow further perhaps to SEK35 billion. The Riksbank could also push back the expected timing of the first rate hike into 2018. Ordinarily, we would expect further QE tapering to offer more support for the krona although that has not been the case so far. From a medium to long-term perspective the krona looks increasingly cheap.

In contrast, the upcoming Norges Bank meeting is likely to have a more limited impact on the Norwegian krone. The Norges Bank has traded on a firmer footing since the Norges Bank’s last policy meeting when it adopted a neutral policy bias by dropping the signal that it planned to lower rates further. The Norges Bank is nowhere near to starting out on a tightening cycle in the near-term. As a result, the policy signal is likely to remain stuck in neutral for the foreseeable future and is unlikely to provide a fresh trigger which could accelerate krone upside. Nonetheless, we still expect the krone’s gradual up trend to remain firmly in place.”