Articles
3 September 2018

Riksbank preview: Still in standby mode

Continued weak inflation pressure means the Swedish central bank is likely to (yet again) signal a delay in hiking interest rates. But having said that, we think the Riksbank will keep its options open

No policy change in September but a signal for later

The Riksbank is in a tricky spot, part of it is its own making. It looks to us like the committee would like to hike rates, and a ten basis point hike in December cannot be excluded. But given how adamant Governor Stefan Ingves has been that inflation needs to return sustainably to target before monetary stimulus is withdrawn, the likelihood is that further delays lie ahead.

At the Riksbank's monetary policy committee meeting, this Thursday (6 September) it is likely to keep the policy rate and asset purchase programme unchanged. But the new policy statement and interest rate forecast will be important signals for the path of policy later this year.

We think the most likely outcome is that the committee shifts its forecast of interest rates to indicate a slightly later rate hike. But the current situation is not clear-cut, and other scenarios are quite plausible. The key reason why we favour a small change to the forecast is that we think policymakers will want to avoid committing fully one way or the other and wait to make the final decision on hiking rates until later this year.

Four scenarios for the Riksbank in September

Source: ING research
ING research

Solid growth but weak inflation pressures

The Swedish central bank is in a bind. The economy continues to grow strongly – GDP growth exceeds 3% in the first half of the year while unemployment is at cyclical lows – and the central bank would probably like to raise rates. But despite the strong economy (and a considerably weaker exchange rate), there are few signs that underlying price pressures in the Swedish economy are picking up.

While rising energy prices have pushed headline inflation above 2%, core inflation has fallen to 1.3% in July. Wage growth has hardly moved in 2018 (an estimated 2.5% annual rate over the first half of the year, compared to 2.4% in 2017).

The Riksbank’s forecast for core inflation has, yet again, proven too optimistic. Both the June and July figures came in below the latest forecast. Compared to the December 2017 forecast, which expected core inflation at 2% by now, core inflation looks even more puzzling. We expect that, once again, the Riksbank will adjust its forecast for core inflation downwards.

Core inflation and Riksbank forecasts

Source: Macrobond
Macrobond

Currency weakness and turmoil on global markets

One of the more striking developments since the July meeting is the rapid depreciation of the Swedish krona. Instead of the appreciation, the Riksbank expected, the KIX trade-weighted index is now around 2% weaker than in July. This continues a pattern since late 2017. Compared to expectations at the turn of the year, KIX is now close to 10% weaker.

In some ways, this is good news for the Riksbank. Having long worried that a rapid appreciation of the krona would undermine progress on bringing inflation to target, this year’s depreciation should instead boost inflation. Policymakers have not appeared overly worried by the depreciation, though it’s worth remembering there was some verbal intervention in early May when EUR/SEK was around similar levels as now, and we think Governor Ingves may seek to avoid triggering further krona weakness.

Another key development is the emerging market sell-off in August, precipitated by crisis situations in Turkey and Argentina. While developed markets have held up pretty well, and the issues facing Turkey and Argentina are to a large extent idiosyncratic, the Riksbank will no doubt add emerging markets to its already long list of downside risks.

Krona trade-weighted index and Riksbank forecasts

Source: Macrobond
Macrobond

A divided committee

Policymakers have become gradually more divided as the year has gone on. Deputy Governor Henry Ohlsson has been voting to raise the policy rate since February, and Martin Floden signalled in July he is likely to join him soon too. Cecilia Skingsley also seems to lean towards hiking rates this year, though doesn’t seem quite as urgent about it. But by December, all three are likely to vote for higher interest rates.

On the other side of the argument, Deputy Governor Jansson has long suggested continued soft inflation and the ECB’s dovish policy stance means the Riksbank should not hike rates until 2019. Governor Ingves and Deputy Governor Af Jochnick have been less explicit in their reasoning but clearly, think along similar lines.

The inflation misses in June and July suggest this block of three (a majority thanks to Governor Ingves' tie-breaking vote) will move the interest rate forecast back a little to signal that policy will be a bit looser than implied by the current forecast. In our view, they want to buy some time to see whether underlying inflation can strengthen over the autumn.

If it does, then a December rate hike becomes possible. Even then, the ECB’s loose policy settings and global risks such as the US-China trade war and emerging market woes could worry the doves sufficiently to delay the rate hike. If, as we think more likely, underlying inflation remains relatively weak, then the majority on committee will delay hiking rates until 2019.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).