Yesterday the National Institute of Economic Research (NIER) published its new macro forecast for Sweden. Of particular interest is the NIER inflation forecast (historically NIER has proven to be quite successful in forecasting inflation).
Interestingly, the new NIER CPIF forecast is almost identical to our own forecast. The maximum deviation is 0.22 percentage points (September 2014).
The reasons behind the forecast for moderate inflation going forward are very similar to our own: running wage deals establish modest cost pressures, low rates translate to modest increases in rents which in turn play an important role for inflation, intensified competition, etc.
However, there has been some inconsistency between our CPIF forecast and our Riksbank (RB) projections. As we have explained several times, we expect the RB to cut by 25bp in July. Our CPI forecast, however, has included a technical assumption of the first (two) rate hikes occurring already during the latter part of next year.
In light of our CPIF forecast not even reaching 1.5% by end-2015, this assumption appears inconsistent; it is hard to believe that the RB will consider policy tightening at such low inflation rates. It seems more probable that policy tightening might be an issue from summer 2016 (even that would be well ahead of the ECB judging by its current forward guidance). If the RB (finally) were to communicate a policy intention along these lines, we think there would be a market response simply because it means that the RB rate path – for a change – would be below the current market pricing during the next two years.
Consequently, our CPI forecast shifts down – basically aligning with the NIER forecast (see chart on next page).
To sum up, given our CPIF forecast, we expect the Riksbank to ease by 25bp in July and we do not see any rate hikes before summer 2016.
We will elaborate further on this in Reading the Markets Sweden (Marknadsrapporten) on Monday.
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