Riksbank to make another shift of the rate path – Danske Bank

According to analysts at Danske Bank, now is the time for the Riksbank to make another shift of the rate path by pushing hikes further out in the future, presumably until the first quarter of 2019.

Key Quotes

“Observe that in a sense the Riksbank is working with two different time perspectives. The forecast horizon is three years and, in this case, macro assumptions are key. To put it differently, the Phillips curve is key. In short, above-trend growth should (eventually) lead to higher wage increases and hence higher inflation.”

“We see no particular reason for the Riksbank to paint a less optimistic picture for growth than in February. It will probably mention possible disruptions related to trade conflicts as a downside risk but not more than that. In addition, we believe the Riksbank will probably not sound more concerned about the housing market than previously. So, growth close to 3.0% and around 2.0% in 2019-20, in line with the February projection, seems like a fair guessto us.”

“So, if the Riksbank was close to delaying hikes in February, we think now is the time to pull the trigger. The current rate path indicates a first rate hike in Q3. Considering the announcement dates in Q3 and that the efficient date is from Wednesday the week after the announcement, it would require a rather odd hike in basis points (depending on July or September) to reach an exact average of -0.40% as suggested by the current forecast. However, making such exact calculations is probably to exaggerate. The Riksbank forecast is more of an indication. Pushing out hikes one quarter (i.e. to October or December) would not, as we see it, give the Riksbank much more leeway to assess the situation and this is why we think a further delay is more likely.”

“A different question is whether this would eventually prove too early as well. Strictly on the basis of our own inflation forecast, the answer would be yes. Also, policy signals from the ECB would be important too. Currently, the market and the ECB seem rather well aligned. The ECB is expected to start raising rates by summer (Q2) 2019. So far, this has been our view too. However, our ECB watchers have adjusted the forecast. In June, the ECB staff forecast for growth and inflation is likely to be revised down somewhat. Consequently, we have shifted our expectation of the first move from the ECB out from June 2019 to December 2019.”