ECB? BoE? No – Swedish CPI

There will be a lot of focus on the ECB and Bank of England monetary policy meetings and press conferences and minutes on Thursday, but frankly I can’t see much of interest coming out of either. The ECB has only just announced its latest easing, so can’t really be expected to do anything or say a great deal. Inflation is a touch lower with the oil price, but not so much that it changes the long term view, and the economy continues to perform OK.

For the BoE, there isn’t much reason for anyone to change their view, though McCafferty could decide to fold short term on his rate hike call, but even if he does it doesn’t make a lot of difference. Clearly the manufacturing data has softened, and growth in general may be slowing a touch, so policy is on hold. I doubt they will say anything that significantly changes market pricing for the first UK rate hike. If they had any sense, they would try to talk GBP down a bit in the minutes. Although in reality the recent weakness of manufacturing probably has very little to do with the overvalued pound, a weaker pound wouldn’t hurt, and in bringing inflation up would allow a rate hike at some point which would be good for the balance of the economy. I’m not holding my breath expecting a GBP collapse on the minutes, but it seems to me that’s the risk if there is one.

But all this is really just hot air. Swedish CPI for December looks more interesting to me. The Riksbank have been resolutely talking down the SEK and threatening all manner of measures to stop it going up too fast, essentially because they have an inflation target and worry that a stronger SEK will kill progress towards it.Frankly, I think their stance is bonkers, as recent experience of inflation targeting has shown that trying to target it too closely is likely to be unsuccessful in the short run and counterproductive in the long run. The Swedish economy grew at about 4% in 2015 and is expected to do the same in 2016. Inflation being 1% below target (and rising) is not a big problem. The SEK will have to go up sooner or later. Best to let it go up when the economy is in shape to deal with it.

Still, rightly or wrongly the Riksbank has it’s inflation blinkers on, so a weak number on Thursday will get everyone thinking they might cut rates again. I doubt it myself, but it would probably be enough to send EUR/SEK to 9.30 or so. Conversely, a strong number would allay some of the low inflation concerns, and send it to 9.20. I doubt the Riksbank would get involved with their threatened intervention this side of 9.20, and probably not before 9.10 if inflation is stronger. Risks are probably towards a weaker than expected number rather than a stronger one, but I’m a buyer of SEK on the dip, as it’s only as low as it is because people are worried about Riksbank action, and they won’t do anything if the currency dips.



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