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SWE: Riksbank – QE program extended until YE 2016 At odds with our forecast the board decided to increase and extend the QE program by SEK 45bn in the second half of 2016. Also, index linked bonds was added to the program. During the second half of this year the Riksbank will buy SEK 30bn nominal bonds while the purchase of SEK 15bn in index linked bonds will begin already in June, to get the program started before the summer break. Furthermore, the Riksbank re-iterated the 3bps downside bias in the repo rate path and also says it stands ready to do more if the upturn in inflation is threatened, saying that rates can be lowered further (possibly by introducing a 2-tier system in the monetary operational system), buy more assets or possibly intervening in the currency market if the currency strengthens too quickly. The board has made a minor revision in the press release saying that more monetary policy expansion now is seen as less likely. Tapering, but less than expected. Since the beginning of last year the Riksbank has been buying bonds at a rate of SEK 67bn per half year which means that the pace of the purchases is being reduced by approximately 1/3 (the weekly purchases will be reduced to approximately SEK 2bn from SEK 3bn). Furthermore, Cecilia Skingsley made reservations against the expanded QE program referring to the currently strong Swedish economy. Somewhat surprisingly, Martin Flodén and Henry Ohlsson, who made reservations against the rate cut in February, supported the expansion today. Minor moves towards less expansive stance We had expected the Riksbank to stay on hold today signalling a larger tolerance to the time needed to return inflation to target, partly by accepting a stronger krona and today’s decision is clear a setback for this projection. Still, we think there are some small signs that the board is becoming less aggressive in its monetary easing. One conclusion in the monetary policy report is e.g. that capacity utilization currently is close to normal. THURSDAY 21 APRIL 2016 We-iterate our call that the Riksbank is through easing in this cycle and it will take either weaker growth or a significantly stronger krona to motivate more easing. Another rate cut or the introduction of a 2-tier system in the monetary policy frame work are seen as the most likely measure if more expansion is needed. Minor changes to macro forecast. As expected GDP and inflation were raised slightly this year, and lowered next year. The downward revision to inflation next year is, however, smaller than we had predicted and our own CPIF forecast is 0.5%-points below the Riksbank’s estimate. This highlights that our prediction that the Riksbank is through expanding policy to some extent is contingent on the board re-thinking its current policy strategy. We, however, continue to be slightly more optimistic on growth. Market response will not please Ingves. Expectations were split ahead of the meeting with around 50% of analysts predicting that the QE program would be expanded, but slightly less than 50% of investors predicting more bond purchases according to our investor survey. Interest rate spreads to Germany were largely unchanged after the decision, while the krona even strengthened slightly vs the Euro. The unchanged spread to Germany indicates that expectations for more QE in April may have been more widespread than indicated by our survey. The unchanged exchange rate supports our conclusion that QE has little impact on the exchange rate. You can also find our research materials at our website: www.mb.seb.se. This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any direct or consequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice. 1 Central Bank Insights Riksbank forecast on April Riksbank forecast in Apr CPI 16 1.0 Riksbank forecast in Feb 0.7 What SEB expected in Apr 0.9 CPI 17 1.9 2.1 1.8 CPI 18 2.9 2.9 2.9 CPIF 16 1.4 1.3 1.4 CPIF 17 2.0 2.1 1.8 CPIF 18 2.2 2.1 2.1 GDP 16 3.7 3.5 3.8 GDP 17 2,7 2.8 2.8 GDP 18 2.3 2.5 2.5 Unemploym. 16 6.8 6.8 6.8 Unemploym. 17 6.6 6.7 6.7 Unemploym. 18 6.7 6.9 6.8 Employment 16 1.6 1.6 1.7 Employment 17 1.1 1.3 1.4 Employment 18 0.7 1.3 1.3 Wages 16 3.1 3.2 3.2 Wages 17 3.5 3.5 3.5 Wages 18 3.5 3.4 3.4 KIX 2016 108.5 109.1 108.7 KIX 2017 106.3 107.3 107.1 KIX 2018 105.7 105.7 105.7 2.0 Int. GDP 16 1.9 2.1 Int. GDP 17 2.3 2.4 2.3 Int. GDP 18 2.4 2.5 2.5 /Olle Holmgren Please see disclaimers at the end at the report 2 Central Bank Insights 3