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Central Bank Watch Sweden
Soft signals but no changes
Torbjörn Isaksson
Chief Analyst
Research
+46 8 614 8859
@TorbjrnIsaksson
[email protected]
Nordea Research, 2 September 2014
We expect the Riksbank to leave the repo rate unchanged at this week’s
monetary policy meeting (announcement on Thursday 4 September). Also the
repo rate path from the July Monetary Policy Report should remain intact.
No more rate cuts
The Riksbank’s July monetary policy meeting may best be described as a
monetary policy jolt. The repo rate was cut by 50 bp to 0.25%, the repo rate
path was slightly biased towards an even lower repo rate near term, and the
timing of the first rate hike was postponed to end-2015. In the minutes of the
monetary policy meeting the bank stated that “… rising inflation is now its
top priority” and that 0.25% need not constitute the bottom for the repo rate.
Surprisingly large rate cut
in July
The Riksbank’s move in July should be seen in light of the CPIF reading for
March showing zero inflation (released two days after the Riksbank’s meeting in April), which no doubt was like an ice bucket shower for the Executive Board. CPIF inflation did edge higher later on, but the two subsequent
readings were still below the bank’s forecast.
Zero inflation in March a
warning signal
Although the Riksbank is no doubt under severe pressure and fighting to
sustain the credibility of its 2% inflation target, we do not expect a further
repo rate cut, neither this week nor later on. The reason is that CPIF-inflation
should move higher in H2 2014 and close the year around 1%, in line with
the bank’s forecast.
No more rate cuts
An important factor ahead of this week’s policy meeting is that the two CPIF
readings since the July meeting have both been 0.2% point higher than the
Riksbank’s forecast.
Higher-than-expected CPIF
inflation
Inflation expectations cause concern
Inflation expectations are a key factor in this context. Besides the inflation
readings, the most striking factor is the nosediving household inflation expectations in August, to a mere 0.2%.
CPIF readings for once above Riksbank’s forecast
Contents
No more rate cuts ...................... 1 Inflation expectations cause
concern ....................................... 1 Mixed picture of the economy .. 2 The krona a key tool ................. 2 nordeamarkets.com/research
Small changes and soft signals
Don’t rely on household
inflation expectations
However, household inflation expectations are very volatile and rarely on the
mark. Moreover, short-term inflation expectations are normally closely correlated with actual inflation. Should inflation pick up during the autumn in
line with our forecast, household inflation expectations will likely rise too. In
other words, household expectations may cause some concern at the Riksbank, but they are not significant enough to cause a change in monetary policy. The two Prospera surveys (mapping money market players) released
since the July meeting suggest stable inflation expectations.
Mixed picture of the economy
Weaker-than-expected
GDP growth in Q2
Stronger-than-expected
employment
Housing market heatens up
GDP growth in Q2 was 0.2% q/q and below the Riksbank’s forecast of
0.6%. Although GDP growth is not a focal point for the bank, declining economic activity could put the Riksbank in a conundrum. The crisis in Ukraine
is a growing uncertainty in this respect, which the Riksbank will recognize
but not act on at this point.
The Q2 GDP number is a flash estimate and should be taken with a pinch of
salt. In addition, certain sectors of the economy continued to show a benign
trend, including household consumption and construction. And the steady
increase in employment paints a different and probably more reliable picture
of developments in the economy than the GDP numbers. Developments in
the housing market suggest that parts of the Swedish economy could be
heading towards overheating. The Riksbank argues that risks related to
household indebtedness should be tackled by other authorities than the Riksbank, and according to Governor Ingves, “it is urgent”.
The krona a key tool
SEK in line with Riksbank’s
forecast
Only minor changes compared to July monetary
policy report
One of the few tools that the Riksbank may make use of to influence inflation near term is the SEK exchange rate. The krona is therefore very important. Over the past months the SEK rate has been largely in line with the
Riksbank’s forecast. The relatively strong Swedish economy and the ECB’s
monetary policy line put the SEK under constant appreciation pressure, and
the Riksbank is trying to counter that. Consequently, the bank will probably
continue to send soft monetary policy signals, for instance by maintaining its
repo rate path’s short-term bias towards a lower repo rate.
All in all, we do not expect any major changes in the monetary policy update
due out on Thursday 4 September. The Riksbank will likely continue to emphasise its inflation target and say that it is prepared to act, should inflation
not move higher. But we believe that inflation will move higher and therefore do not expect the Riksbank to cut rates further, while a rate hike still
seems remote.
See charts on the next page.
nordeamarkets.com/research
Small changes and soft signals
CPIF excluding energy on the rise
3.0
SEK in line with Riksbank’s forecast
% y/y
% y/y
2.5
3.0
2.5
Riksbank
2.0
2.0
CPIF excluding energy
1.5
1.5
1.0
Nordea
0.5
0.0
1.0
0.5
2011
2012
2013
2014
2015
0.0
Source: Nordea Markets and Macrobond
Accelerating house prices
112
Index, november 1992=100
111
KIX
Riksbank's policy
110
meeting 3 July
109
108
107
106
105
104
103
102
101
100
112
111
110
109
108
107
106
105
Riksbank
104
103
102
101
100
99
99
2012
2013
2014
Source: Nordea Markets and Macrobond
Imported inflation should pick up going forward
Unemployment better than feared ...
… thanks to increased employment
Percent
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