Riksbank Lifts Rates by 25bp - Not in a Rush to Hike Again This Year
As expected, the Riksbank increased rates by 25bp to 2% and signalled that further tightening is likely though not just yet. The Executive Board was unanimous in its decision, as expected.
The key line in the press release was “if the outlook for inflation and economic activity holds, it is likely that the policy rate will be raised further in the coming year, in line with the policy rate forecast in September”. The wording in the statement is not supportive of another near-term rate hike, and given that both up and downside risks to the rate outlook mentioned in the press statement, the overall impression is on the dovish side. The market now thinks there is a higher chance of the Riksbank hiking twice more, once in February (95% chance priced in) followed by a further increase in May.
The statement noted that “Overall, recent developments have largely been in line with the Riksbank's forecast, which implies that economic conditions are strengthening further and will become normal next year”. CPIF excluding energy was 0.2 percentage points below the Riksbank’s forecast in September though this softer near-term outturn is unlikely to change the monetary policy outlook. The Riksbank projections (Figure 2) show inflation picking up ahead. Stronger domestic economic activity and the weakening of the krona so far this year “are also expected to contribute to higher consumer prices. Overall, the Riksbank's assessment is that inflation will rise going forward but stabilise at the target after some time.”
The Riksbank also announced that it will finance parts of the foreign currency reserve with loans via the National Debt Office. The loan will amount to SEK 200bn and will keep the total reserves unchanged, the Riksbank will partially sell foreign currency and replace the existing FX swaps over a period of 12-18 months.
We continue to expect 2.25% to be the peak in the current tightening cycle.
Figure 1: Sweden and ECB Policy Rates (%)
Source: Datastream/CE
Figure 2: Riksbank New Projection for Inflation
Source: November Riksbank Monetary Policy Report (here)