In line with the consensus, the bank decided to leave the repo unchanged at 0.75%. The rate path, however, was revised lower and the near-term easing bias increased to 40% (for July) from 16% (for this meeting). The first rate hike is brought forward to July 2015 (from February 2015 previously) and overall this was another dovish message from the bank.
The voting was 4-2 in favor of unchanged, with governor Ekholm and Flodén arguing for a rate cut and a lower rate path (0.50% the coming year). When it comes to the forecasts a dramatic downwards revision of ULC for 2014 from 1.8 to 1.0% is the main reason for revising down end 2014 CPIF from 1.5 to 1.2%. The CPIF forecast for 2014 is now spot on with Nordea’s forecast. Further out, the Riksbank doesn’t see CPIF reaching 2% until mid-2016. GDP is upwardly revised 2014 to 2.8% while it is downwardly revised to a still strong 3% for 2015 primarily due to lower personal consumption.
In our view, the bank has now paved the way quite clearly for a rate cut at the next meeting in July and the market should at least give it a 50% probability (we suspect that the base-line scenario for most economists will now be a July rate cut). Into the meeting we have been recommending to receive June’14 RIBA as a cheap play on a rate cut. This contract will now settle at 0.75% and we need to book a 1.5bps loss. Our other strategy, to receive Dec’15 FRA vs Euribor (entered at 110, currently around 90bps), however, performs a few bps and we keep it for now. When it comes to the currency, we see further potential for a weakening of the SEK against EUR and NOK in the near-term.
Nordea