We see two ways the ECB message from Thursday could affect the Riksbank. First, the Riksbank's euro area inflation forecast needs to be lowered and that feeds into the Swedish inflation projection. Secondly, as we see, the ECB's inflation forecast, which implies inflation way below the target even by the end of 2016, in combination with forward guidance in general, strongly suggests the ECB intends to keep rates unchanged until 2017 at the earliest. On that assumption, the current Riksbank repo rate forecast implies a key rate differential of 50bp by end-2014, 147bp by end-2015 and 239bp by end-2016.
This can be compared with current relative market pricing, which implies a rate spread by the end of each year of some 45bp, 65bp and 90bp, respectively. If the market suddenly aligns with the Riksbank's repo-rate forecast, the result should be a considerable appreciation of the krona and therefore lower (imported) inflation. In our view, the message from the ECB is unlikely to have much of an impact on the rate decision (cut or unchanged) in July but is likely to be of greater importance for the shape of the repo rate path, i.e. when to signal a first hike (later) and at what pace (slower).
To Read the Entire Report Please Click on the pdf File Below