Is the December Riksbank rate hike 'in danger' after the November inflation report? Had it been a couple of years ago - or maybe even a year ago - we would undoubtedly have answered yes. Now, it is less obvious for various reasons.
First we look at inflation data (see charts to the right and at the end of this report). Compared with our forecast (and other Swedish banks' projections), the November print was not really a big thing even when looking at the details. One thing worth mentioning is food prices. There has been a lot of talk about higher food prices lately because of the very hot summer and poor harvests. Recent price plans expressed by food chains in the NIER surveys have soared. To date, we have not seen any signs of that in the actual data - indeed, food prices came in a little lower (m/m) than in November 2017. However, we are fully aware that food could pop later on.
Taking a broader view, services price inflation (much in focus for the Riksbank), which declined sharply from August 2017 (a base effect) has stabilised, fully in line with what seems reasonable, but it shows no convincing signs of moving higher either. Inflation as such is once again below the Riksbank's forecast (about three-tenths of a percentage point for CPIF and CPIF excluding energy). Again, one or two years ago, this would had been enough to make the Riksbank board sit on their hands.
Turning to the December policy decision, global uncertainties expressed by many board members in October have not really abated (UK Prime Minister Theresa May is up for a 'no confidence' vote later today). Nor have uncertainties about the outlook for growth, Equity markets have slumped and market-implied future rate hikes have been scaled down and not just in Sweden.
At the same time, we see a shift in the overall impression of the board in the sense that a repo rate of -50 basis points (combined with QE) is an emergency rate no longer required, considering that inflation expectations are stable and close to 2%. We also find it hard to believe that the Riksbank growth forecast will be revised to an extent that points to an economic slump in Sweden - it never does so until it is a fact.
One could say that the Riksbank has the opportunity to wait until February. Well, it always has the opportunity to wait but the question is how much wiser it would be at that point.
The market is currently pricing in a 70% probability of a December hike. We think this is fair. The July meeting is much more of an open question. Right now, we would say there is an equal chance of a hike as much as a no hike.
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