The reason we have not seen another rate cut from the Riksbank is that our inflation forecast has not deviated from the Riksbank projection in any meaningful way. We have argued 'low for long' with a first rate hike not before summer 2016. Our inflation forecast profile has sloped upwards very much in line with the Riksbank's for the coming months (until March 2015). It still has an upward slope but now from a lower level. See Flash Comment Sweden: September CPI triggers Riksbank response , 14 October.
The Riksbank has indicated low tolerance for negative surprises. The low September inflation numbers - 0.4pp below the Riksbank's y/y forecasts for both CPI and CPIF - arguably qualify as a major negative surprise for the Riksbank. Hence, this is enough, in our view, to trigger another cut, if not at the 27 October meeting then in December at the latest. We now look for 15bp down to 0.10%. The numbers were also a surprise to markets as reflected by a 10-figures rally in EUR/SEK and the money market raising the probability of a 0.15bp cut from 50% before the figures to 90-95% now. Hence, a cut of the magnitude we envisage is already fully priced in. Does it mean that we think the rally in EUR/SEK will not go any further? Not necessarily. EUR/SEK meets resistance at just below 9.17 but a break would open the way for a new trading range of 9.20-9.30.
It should be remembered that the unexpected 50bp rate cut this summer had only short-lived impact on EUR/SEK. A few weeks after 3 July EUR/SEK was back below pre-cut levels. In this perspective, it will probably take more than an almost fully anticipated 15bp rate cut in October or December and a delay in the first rate hike to significantly weaken the krona. Hints of unconventional measures? On balance, the SEK is likely to trade on a weaker note than previously expected but an additional small rate cut does not change the medium-term outlook for the SEK that we described in more detail in FX Strategy: Our EUR/SEK target reached - now what? , 2 October.
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