The latest Riksbank monetary policy update resulted in an unchanged policy outlook. Although the central bank concedes that the macro outlook has brightened since the April update, policymakers anticipate the need for continued support as the risks of the pandemic have yet to fully dissipate. Subsequently, economists at CIBC expect the Swedish krona to outperform in the second half of the year.
Inflationary pressures are still deemed to be moderate
“Although the Riksbank assumes policy will remain unchanged through the policy period, to the end of 2024, we see some risks of an earlier tightening. True, the upgrades to CPIF were modest through to the end of 2023, but inflation is expected to be materially above the 2% CPI target in 2024 (the bank assumes 2.3%), which points towards a disconnect in terms of the forecasts and the rate assumptions.”
“The presumption of GDP growth exceeding 4% next year, which represented a 0.5% upgrade, points towards an increasingly positive output gap, and adds further upside risks for earlier hikes from the bank.”
“With the central bank already worried by surging house prices, as annual growth is running at around 20%, and average debt-to-income ratios are around 200%, the need for forward policy adjustment is increasing.”
“Sweden remains a small open economy correlated to a larger neighbour, Germany. Upbeat activity data suggests the bank could be forced to consider action in a little over a year, rather than by Q3 2023 as currently implied by the interest rate curve. That macro backdrop points towards SEK outperformance in H2.”
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