The Riksbank, Sweden’s central bank, said it still expects to tighten policy around the turn of the year, surprising markets and sparking big gains in the long-suffering crown currency.

With the Swedish economy slowing after years of strong growth, many analysts had expected the Riksbank to postpone plans to raise interest rates and to make further downward adjustments to the rate path at future meetings.

However, after holding their benchmark interest rate unchanged at -0.25% as expected, rate-setters pointed to high resource utilisation and inflation close to target as indications that the economy would remain strong in the short term, supporting plans to hike late this year or early next.

“It was surprisingly hawkish,” Carl Hammer, economist at SEB, said. “Something tells me they want to reach the zero interest rate level and after that they say that the next raise is very far away.”

The Riksbank said uncertainty over the trade war between the United States and China and Britain’s exit from the European Union meant that rate hikes would proceed more slowly in the years ahead.

“Low interest rates abroad and worsened sentiment mean that the interest rate is expected to be increased at a slower pace thereafter than in the previous forecast,” the central bank said in a statement.

With interest rates still in negative territory years after the financial crisis, the crown has been under pressure, depreciating 5% against the euro since the beginning of 2019 alone.

The Riksbank has managed only one rate hike since mid-2011, despite years of strong growth and inflation near its 2% target.

With the central bank also owning more than 50% of the outstanding stock of government bonds, that leaves it very short on ammunition should a future economic downturn prove to be long and deep.

The relatively hawkish message from the Riksbank helped the Swedish crown gain against the euro, up around 0.7% since the statement, but analysts remained sceptical over whether the central bank would deliver on its plans.

“We maintain our Riksbank call of no rate changes in the next two years, but note that global development will have a high impact on the board’s future decisions,” Swedbank said in a note.

The US Federal Reserve has already cut rates, while the European Central Bank is seen easing on Sept.12.

The Swedish crown rose strongly after the country’s central bank said it still expected to tighten monetary policy around the turn of the year, surprising markets and sparking big gains in the long-suffering currency.

After holding its benchmark interest rate unchanged at -0.25% as expected, the Riksbank pointed to high resource utilisation and inflation close to target as indications that the economy would remain strong in the short term, supporting plans to hike later this year or early 2020.

Riksbank Governor Stefan Ingves said “it would not be strange” if interest rates in Sweden were “a little higher than in Europe.” This contrasts with expectations of the European Central Bank, which is forecast to cut interest rates on Sept.12 and announce a new wave of quantitative easing.

The Swedish crown jumped to a two-week high of 10.6575 against the euro, and also rallied 0.8% against the dollar. The crown has risen in the past few days, having shed more than 4.5% of its value versus the euro this year.

Elsewhere, the Japanese yen slipped and risky currencies flourished on Thursday as investors turned more optimistic that the United States will find common ground with China on trade after agreeing to hold talks in October.

This has pushed down the yen to a three-week low of 106.75 against the dollar. The yen was last down 0.1% at 106.555, though overall the Japanese yen had been rising this year.

The Australian dollar, a currency particularly sensitive to global trade tensions, rose to a one-month high of 0.68255 against the US dollar and was last up 0.3% at $0.6815. The New Zealand dollar rose to a nine-day high of $0.6385.

The Chinese yuan rose to a two-week high of 7.1213 against the dollar in the offshore market, but was last unchanged at 7.1486 yuan per dollar.

The US-China agreement to hold talks in October should not be seen as an incremental step towards resolving trade tensions, said Stephen Gallo, European head of forex strategy at BMO Capital Markets. “It’s toing and froing, that’s all,” Gallo said, as he thinks that agreeing to hold talks is a manoeuvre from both sides to calm investor nerves. The dollar, seen by many as immune to Sino-US trade spats, was slightly higher against both the euro and five other major currencies. Euro/dollar was last at $1.1052, up 0.2%.

Gallo said he would not add more euro/dollar positions and that he would be looking to sell the euro if it reached $1.11 or $1.1150.

Reuters