Main takeaways. The fact that the Riksbank chose to reduce inflation (in particular CPIF ex Energy due to lower-than-expected wage increases) and GDP forecasts (now recognising that housing construction activity will decrease more than expected previously) while keeping the repo rate unchanged puzzled us initially, as it suggested a slightly more hawkish stance. However, the devil is in the details. Under 'policy considerations' in the report, the Riksbank argues: 'All in all, this suggests that it is now appropriate to leave the forecast for the repo rate unchanged and to begin slow rate rises at some point during the second half of the year. But it has taken a long time to bring up inflation and inflation expectations and the uncertainty surrounding the development of inflation means that monetary policy need to proceed cautiously. In light of this, the above-mentioned uncertainty factors could also be seen as arguments for postponing rate rises slightly . This of course is a way of postponing the repo rate path without actually changing it. Or what we would call a kind of verbal 'soft guidance' of the repo rate path, delaying rate increases slightly. The overall indication is that the Riksbank is slightly softer than before.
Uncertainty considerations. 'There are occasions on which, in the monetary policy deliberations, one may wish to pay particular attention to certain risks, the consequences of which may have a severe impact on economic development. But, on other occasions, one may need to await more information before monetary policy can be adjusted . We get the impression that the board majority right now is in wait-and-see mode.
Conclusion . We have elaborated with a base Riksbank scenario (no rate hikes this year) and a not improbable alternative scenario (one or possibly two hikes than a pause for a year or so). Admittedly, it looks like a close call. That the Riksbank is sticking to the rate path despite lowering the inflation forecast could be taken as hawkish but, in our view, this is not really vindicated by the policy report. This suggests that the Riksbank was close to delaying the first hike. For now, we stick to our base case as the most probable but the minutes published on Friday next week will be of the essence just like the coming inflation data.
Fixed income pricing: The market is now pricing the repo rate trajectory close to the Riksbank's own projection. Hence, the burden of proof relating to the outlook for higher wage growth, which is expected to result in higher domestic inflation (primarily service inflation), sets the stake for both Riksbank and market pricing relatively high. This is clearly highlighted by the Riksbank's concerns about the link between growth and wages/inflation. Most forecasters see a lower CPIF ex energy than Riksbank, still market pricing is at or slightly above Riksbank's path. Despite an unchanged repo rate path, the soft verbal guidance gives the impression that risk/reward being sold/paid is poor in the current interest rate environment.
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