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Nordea Markets analysts note that the Riksbank made a major downward revision of its estimate of the future rate path on April 24 as the surprisingly low inflation outcomes in the beginning of the year were seen as the main reason for the lower rate path.

Key Quotes

“Governor Ingves however appeared to reveal in a major speech on May 7 that other key components of the bank’s analytical framework for setting the appropriate level of interest rates have also been changed.”

“A downward revision of the neutral rate would have first-order importance for how the Riksbank gauges the appropriate policy stance going forward. This especially holds as the Riksbank came out fairly strong in favour of Taylor-type rules for setting interest rates in the speech.”

“Nordea learnt from follow-up discussions with the Riksbank that the speech was maybe not intended to be as much a future declaration of monetary policy intentions as the text reads on its own. At the same time, a shift down in the Riksbank’s estimate of the neutral rate would make the current policy stance much more consistent with the speech’s Taylor rule approach, and as such we still believe the speech seem to relatively closely reflect its current thinking.”

“A lower neutral rate would also have warranted a lower repo rate before the Riksbank implemented negative rates in 2015. The very expansionary policy conducted since 2015 in part has been justified with the argument that previous policy was too tight to establish inflation expectations at 2%. A lower neutral rate thus makes the reasoning behind the lowered path announced on April 24 more understandable.”

“Both disappointing inflation prints and a lower assessment of the neutral rate thus bring the Riksbank ever closer to its Japanese counterpart.”