The Riksbank‏ And The Changed Rate Forecast

The title for this post is relevant, as we admit that we seriously misread the Riksbank this time and that market pricing was a better proxy for what it would say. What makes things worse is that we feel that we captured the Riksbank’s updated macro forecast pretty well. Looking at the new numbers, the world growth forecast is basically intact (one-tenth lower in 2013 and a tenth higher in 2014). This is interesting in itself. As we understand it, an important reason why the market (rightly) has priced in a delayed rate hike is the perception of more global weakness. This view is obviously not shared by the Riksbank and is not the reason behind the repo rate revision.

It revises Swedish growth up to 1.4% this year (from 1.3%), 2.9% (was 2.8%) for 2014 and 3.2% (previously 2.9%) for 2015. Then again, part of these revisions probably just reflects a lower rate path. Equally, labour market forecasts are intact or marginally brighter as far as employment is concerned.

So, what explains the changed rate forecast (see chart overleaf). We identify two crucial factors, in our view.

The most important thing is what is described on page 7 of the release. The Riksbank explains that it now judges that consumer prices will increase more slowly in relation to costs over the coming years. What this means in practice is that the Riksbank has made a new and different (model) estimation of the medium-term price elasticity of costs – rather than altered its view on cost development as such.

Second, we get a feeling that the majority has taken a step toward the stance of the minority. On several occasions (also recently) -- not least Stefan Ingves and Thomas Jansson -- have underlined macro prudence as an important factor and the importance of ensuring that households’ debt ratios do not rise further. In February, the Riksbank pointed out that lower rates could be a risk for higher debt and make households more vulnerable to disturbances. This time round the Riksbank writes that it expects more optimistic households to lead to rising house prices, so it expects debt to rise at a faster pace than income through most of the forecast period (sic.).

To Read the Entire Report Please Click on the pdf File Below.