We think the Riksbank will leave the rate path intact on 3 July, indicating a Q4 rate hike. However, in our view, the Board will probably acknowledge some soft development.
Growth: The growth outlook has deteriorated and the Riksbank is likely to reduce the 2018 growth forecast. Q1 growth printed 3.3% y/y, slightly below the Riksbank's 3.5% y/y forecast. More importantly, there is now widespread evidence that residential investment has started to decline. In Q1, the construction of new dwellings fell by some 5% q/q and residential developers' sales fell by 60% y/y - developments the Riksbank needs to take into account, especially as expert organisations such as Boverket (National Housing Board) and Sveriges Byggindustrier (Swedish Construction Federation) have lowered their forecasts. Furthermore, there are strong signals from NIER and Teknikföretagen (Association of Engineering Industries) that new orders show a widespread and sharp slowdown or even outright decline. Hence, the outlook for exports too is deteriorating on the back of the past six months decline in German industry sentiment data (PMI, IFO).
ECB: The 14 June statement from the ECB that it would raise the policy rate in mid-2019 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. However, the Riksbank may be inclined to revert to the 'verbal forward guidance' it introduced at the February meeting, i.e. it could keep the repo rate path unchanged but 'colour' it with a statement saying the risk is that it will be postponed later this year. Why does the Riksbank need to take the ECB into account? Because the policy rate spread is an important determinant of the EUR/SEK rate and, hence, for the KIX index. Needless to say, this, in turn, affects imported inflation.
Inflation: This is, as usual, the most important factor when gauging Riksbank action. As implied above, the Riksbank knows that its inflation forecast does not tolerate any significant appreciation of the SEK, which currently rather boosts import prices. However, 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 the measure of inflation that relates most closely to domestic cost pressures, primarily wage growth. It reveals that the mainly tax and methodologically driven 1one-off bubble seen in services prices in 2017 is over and services inflation is now returning to the 1.0-1.5% y/y level it was at previously.
To read the entire report Please click on the pdf File Below: