Analysts at Danske Bank expect the Riksbank to leave the rate path intact today, indicating a Q4 rate hike and in addition, the Board will probably acknowledge some soft development.
Key Quotes
“Growth: The growth outlook has deteriorated and the Riksbank is likely to reduce the 2018 growth forecast.”
“ECB: The 14 June statement from the ECB that it would raise the policy rate in mid2019 at the earliest is likely to have a strong impact on the Riksbank’s thinking about the future repo rate path. It suggests the Riksbank will postpone the timing of the first hike again so it better matches the ECB. However, we strongly doubt the Riksbank is ready to postpone the repo rate path again at the upcoming meeting, as it did that in April. In our view, it will probably do this in September, or October at the latest.”
“Inflation: This is, as usual, the most important factor when gauging Riksbank action.
This time there will be a lot of focus on services inflation, which has taken a steep dive over the past year: from 4.0 % y/y in July 2017 to 1.8 % y/y in May 2018.”
This is a big worry for most members of the Executive Board, as it suggests that domestic inflation and hence CPIF excluding energy inflation are slowing and most likely stabilising at a level well below the 2.0% target, close to 1.5% y/y for the rest of 2018.
We believe it will see through energy prices and focus on the excluding-energy measure. However, given that CPIF has been close to the target for some time now, we do not entirely preclude the possibility that the Riksbank will, in our eyes, make a policy mistake and raise the repo rate according to its current forecast later this year.”
“Conclusion: After the ECB and the deterioration of the growth outlook, we estimate an 85-90% chance of the Riksbank hiking the repo rate in Q3 19 at the earliest. There is currently still a small 10-15% probability that it will make a mistake later this year, focusing on headline CPIF, raising the repo rate in Q4. In July, we expect no change to either the repo rate or the repo rate path but it might revert to soft verbal guidance as it did in February. We expect no change to QE reinvestments.”
“Market pricing: The market prices some 10bp over the last two meetings of 2018 and another 10bp over the first two meetings of 2019. Even if the Riksbank decides to move in Q4 18, the size of the first move remains very much an open question.”
“SEK implications: In our view, the bank will raise the near-term KIX estimate closer to the current level but maintain a downward sloping path. If anything, it favours a decision not to lower the repo rate path at this meeting.
The main important near-term trigger for EUR/SEK apart from risk sentiment is the Riksbank.
A decision to maintain a hike in Q4 is likely to weigh on EUR/SEK slightly, so buyers of EUR/SEK will get better opportunities. The Riksbank has no interest in giving a hawkish impression though, which should keep any excessive SEK appreciation at bay and limit the downside potential for EUR/SEK.
If the Riksbank indicates that it will not raise rates this year, we believe EUR/SEK is likely to spike sharply higher.”
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