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Central Bank Watch Sweden
Full throttle
Torbjörn Isaksson
Chefsanalytiker
Research
+46 8 614 8859
@TorbjrnIsaksson
torbjorn.isaksson @nordea.com
Nordea Research, 24 June 2014
We expect the Riksbank to cut the repo rate at next week’s monetary policy
meeting (announcement on Thursday 3 July). Given the bank’s signals, the
surprisingly low inflation and the ECB’s monetary policy easing, a rate cut
by 25 bp to 0.50% is a done deal. Instead the focus is on the interest rate
path, which looks set to be lowered yet again.
Caught in a vice
The world is upside down. The Swedish economy has performed well over
the past year and the outlook is favourable. Household consumption is increasing rapidly, house prices and employment are also picking up fast and
construction investment is showing the strongest growth for a very long time.
Nonetheless, the Riksbank is still in easing mode. The reason is that the bank
is caught in a vice between too low inflation and an increasingly expansionary monetary policy from the ECB. As the Swedish FSA has been given the
main mandate in respect of financial stability and macroprudential policies,
the Riksbank can, or is forced, to focus on the low inflation.
We believe that the Riksbank will have to revise its view of cost pressures
and inflation prospects, particularly for next year. This revision will affect
the bank’s 2014 monetary policy reports, starting next week.
As regards cost pressures, the Riksbank has for some time maintained that
companies’ increased costs have not been passed on to customers as is usually the case. However, in our view there are no significant cost increases to
pass on to consumers. A moderate cost pressure is also one of the key conclusions in the Riksbank’s latest companies’ interviews.
Strong domestic economy
Riksbank to revise its inflation forecast
No cost increases to pass on
Core-inflation well below the Riksbank’s view
Content
Caught in a vice ......................... 1 Riksbank stops at 0.50% after all
..................................................... 2 All in all… ................................... 2 nordeamarkets.com/research
Full throttle
Riksbank stops at 0.50% after all
Higher imported inflation
Wage increases to remain
low
Probably some near term
easing bias in the rate path
Lower rate path also longer
out
As we see it, the low inflation is a result of the fact that wage growth and
wage growth expectations have been muted, while imported deflation has at
the same time been significant. The decline in import prices appears to be
decelerating. The strong domestic economy will lift inflation somewhat.
However, wage growth will be historically low as long as the manufacturing
industry is the benchmark for wage negotiations and as long as it is under
pressure of low demand from Europe. We see no signs that this situation will
change, suggesting that it will take a long time before domestic inflation
picks up more substantially.
Our forecast is lower than the Riksbank’s view. Still, we think that next
week’s rate cut will be the last one in this cycle. Partly because of CPIF inflation has bottomed out, and partly because of the more favourable economic trends. Nevertheless, we think that the interest rate path in next week’s
monetary policy report will bottom a few basis points below 0.50%. But the
Riksbank will in all likelihood just signal that it is leaving the door ajar for a
cut rather than fully signal that it actually intends to ease its monetary policy
again.
The rate path will probably be revised downwards longer out too. The Riksbank’s rate path deviates sharply from the ECB’s monetary policy signals
but also from Norges Bank’s rate path and market pricing. In the April report,
the Riksbank’s rate path ended at 2.65% in Q1 2017. A downward revision
towards 2% is not unreasonable. If the rate path is not revised substantially
this time, much indicates that it will be so in later monetary policy reports.
All in all…
Sweden affected by eurozone weakness
Modest wage increases
nordeamarkets.com/research
Summing up we consider a rate cut next week to be a done deal. The interest
rate path looks set to be revised down both short term and long term, probably most sharply at the long end. The Euro-zone countries’ adjustment of
wages, competitiveness and public finances affects the Swedish economy in
many ways – contributing to low inflation, keeping the Riksbank in a vice
and suggesting a relatively low repo rate going forward, despite the strong
domestic economy.
Wage expectations record low
Full throttle
Differences in inflation views, especially next year
Riksbank’s rate path stands out
Employment accelerating
Probably somewhat higher imported inflation ahead
Strong domestic demand
Sharp rise in housing prices
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nordeamarkets.com/research