Riksbank: Stronger growth, higher inflation, but no rate rise for a while - HSBC

The Riksbank raised its growth and inflation forecasts in is recent meet last week but didn't budge its rate profile as it remains concerned by possible SEK strength, explains James Pomeroy, Economist at HSBC.

Key Quotes

“The Riksbank kept its main policy rate on hold at -0.50% at its September meeting, fully in-line with expectations. If one just read the statement and the forecasts, it would be easy to think that the Riksbank had embarked on a more hawkish path: it raised its growth forecast for 2017 by 1ppt to 3.2% and for 2018 up to 2.7%. These match our own forecasts.”

“The inflation forecasts were raised too. The Riksbank now expects CPIF inflation to be 2.0% in 2017, 1.9% in 2018 and 2.1% in 2019. These numbers are all in-line with the new mandate that was also confirmed today. The new mandate aims to target CPIF inflation (rather than CPI inflation) which strips out interest payments. The inflation target remains at 2.0% but with a 1-3% 'variation band'. The Riksbank appears keen to stress that the aim is still to achieve 2% inflation "whether inflation is inside or outside the variation band to start with" but our long-held assumption is that the variation band will make the central bank less reactive to downside surprises to inflation than it has been in recent history.”

“But, this had no impact on the Riksbank's expectations for its policy rate. The repo rate path was unchanged between the July and September meetings, with the central bank expecting to keep the rate at this level until mid-2018 and in negative territory until the middle of 2019.”

“Implications

The Riksbank is clearly turning more optimistic on the health of the Swedish economy and the statement mentioned only a few risks to the strong growth outlook. However, given that inflation has just returned to the 2% level, the central bank wants to maintain that momentum and avoid any upward pressure on the SEK. The Riksbank's line that the krona could appreciate if its monetary policy deviates from that of other countries is therefore key - and supports our view for a rate rise in Q2 2018 once the ECB has started tapering its asset purchases.”