SEK: No more toes in the water? - Rabobank

Tomorrow will bring the latest round of Swedish CPI data, the quarterly labour cost index in addition to the Prospera inflation expectation survey and according to market forecasts, the official inflation data is unlikely to bring much respite to concerns regarding downside risks to inflation, suggests Jane Foley, Research Analyst at Rabobank.

Key Quotes

“Barring any surprises, the implication is that the Riksbank is set to maintain a cautious policy stance going forward.  In turn, this should keep the SEK on the back foot.”

“In December the Riksbank closed its QE programme, albeit in a very dovish way. The Bank announced that due to coupon payments totalling close to SEK 15 bln from Jan 2018 to July 2019 and large redemptions in H1 2019, the Riksbank will retain a presence in the market in order to smooth the impact of all of this activity. Nevertheless the closing of the QE programme was a hawkish signal that was complemented by an indication from the Riksbank that it could hike rates in the middle of 2018.  This was followed by comments from Riksbank Deputy Governor Ohlsson, indicating that there may be risk of an earlier move and a rate hike potentially early in 2018.  The SEK duly rose vs. the EUR between mid-December and into January.  In a marked turnaround, more recent comments from Governor Ingves have reasserted a dovish policy outlook.  Earlier this month EUR/SEK reached its highest levels since 2010.”

“Broadly speaking the economic backdrop in Sweden looks good. The minutes of the February MPC meeting state that “economic activity abroad continues to strengthen and in Sweden, growth is high, the labour market is strong and inflation is close to the target of 2 per cent.”  There have been a few disappointment on the data front in recent weeks, with Q4 GDP registering a softer than expected (but still very robust) 0.9% q/q and retail sales managing a lacklustre 0.1% m/m gain in January.  However, the Riksbank’s current concern lay mostly with weak inflationary developments.”

“On the back of soft wage rises and weaker than expected price rises, the Riksbank has revised down its inflation forecast for the year ahead. The January print of CPIF inflation registered a softer than expected -0.9% m/m, with the CPI dropping by -0.8% m/m.  The February MPC minutes highlighted that several members “expressed concern over the development of inflation in the period ahead and emphasized that downside risks need particularly close attention when determining the appropriate timing and speed at which to initiate rate rises.”

“Previously, the Riksbank has acknowledged that it has required a great deal of support from monetary policy to bring up inflation and inflation expectations. These concerns are likely the crux of the Riksbank’s current anxieties.  Not only is low wage inflation a phenomena common across the G10, but Sweden is among a group of countries suffering from extremely high levels of household debt.  This has possibly increased consumers’ sensitivity to the prospect of higher interest rates.  In addition to these concerns it is likely that the Riksbank is mindful of criticism over a potential policy mistake.  The central bank’s decision to raise rates in 2010-11, shortly after the financial crisis, resulted in calls for more parliamentary oversight.”

“In contrast to the policy signal provided by the ending of the QE programme, the Riksbank has re-established itself as a dovish central bank. In a newspaper interview over the weekend Governor Ingves stated that the central bank can “technically lower the repo rate further”.  He also warned that “above all it can use its balance sheet”.”

“Having pushed higher between mid-December and late January, the SEK last week hit a multi-year low vs. the EUR. Sweden is a small and open economy and the Riksbank will be operating with one eye on the exchange rate.  As long as concerns about low inflation prevail, the Riksbank are likely to want to signal that it will remain behind the pace of the reduction of ECB policy accommodation.  Although we have revised up our forecasts for EUR/SEK, it appears overbought.  Some corrective activity has emerged in recent sessions and we see scope for a pullback towards the EUR/SEK 10.00 area, depending on the outcome of tomorrow’s inflation indications.  That said we have revised up our medium-term forecast to 10.20.”