As expected the Riksbank left the repo rate unchanged today. The repo rate path was also kept unchanged. They keep a probability of some 24% for a rate cut in the upcoming meetings 2013. The rate path still has the first rate hike in Q4 2014.
In the press release the Riksbank note that “An even lower repo rate could lead to inflation attaining the target somewhat sooner. However, at the same time, a lower repo rate now, when the situation for households is already relatively favourable, could lead to a further increase in the risks related to high household debt.” A clear indication that the majority doesn’t want to cut the repo rate.
The economic outlook presented is similar to Nordea’s view with no major revisions since the April monetary policy decision. Worth noting, however, is that the Riksbank has revised unemployment from 7.8 to 8.1% for 2014, i.e. they now believe that it will take longer for the labour market to improve.
The board was split in its decision to leave the repo rate unchanged with new Dep. Governor Flodén voting for a repo rate cut by 25 bps and Dep. Governor Ekholm with 25 bps.
We stick to our forecast that there will be no more rate cuts in this cycle and that the next step from the Riksbank will be a rate hike in 2014. In total we forecast two rate hikes in 2014, leaving the repo rate at 1.50 at year-end. Our risk assessment for 2013 still remains somewhat biased to a lower repo rate primarily on the back of a risk for higher unemployment than the Riksbank’s forecast.
Initial market reactions:
It was always a tricky rate meeting, which has been illustrated by large volatility in what has been priced in (ranging from 22 to 2bps). Indeed, the bank is reluctant to cut rates, but leave open a bias for such a move anyway. Given how much the money market curve has re-steepened lately, and the fact that markets actually still are a bit more hawkish in its pricing than what is implied by the rate path, we continue to see value in SEK receivers. Rates come down some 5bps today, but that was more driven by the very weak services PMI print earlier this morning than the Riksbank. On the currency, we see some potential to sell EUR/SEK considering the current rather elevated rate differentials.
Nordea