I apologise to those who aren’t interested in Sweden – I have harped on about it quite a lot and now I’m going to do so again. If you have no interest look away now.
Today sees the Riksbank monetary policy meeting with the result announced tomorrow. The median market expectation is that the Riksbank will cut rates even further into negative territory, and this is no doubt part of the reason why the SEK remains weak. Now, applying logic to the behaviour of the Riksbank may be foolhardy, as real rates of -1.25% for a country growing at near 4% real seems odd to start with, but I can see no good reason for them to cut rates. Sure, the equity market has been weak and the oil price has fallen since the last meeting, but if you are going to react to monthly moves in these markets you will be changing rates every meeting. It is not clear that these moves will either be sustained or that they will have a significant impact on inflation.
The key factors in the decision seem to me to be as follows:-
- Is there evidence of a weakening in the Swedish economy or a loss of confidence? No. The economic tendency survey – the best short term indicator of GDP – rose again in January and is at the highest level since 2011.
- Is inflation or inflation expectations falling back to problematic levels? It’s too early to say. December CPIF Inflation was a little weaker than expected in the December monetary policy report at 0.9%, against the 1.1% projected, but is projected to rise sharply in January. This data isn’t out until next week. Inflation expectations remain little changed according to surveys.
- Is the exchange rate too strong? No. After strengthening sharply around the turn of the year, the SEK has weakened in the last few weeks to the lowest level since late December (based on the KIX index that the Riksbank use). It is in line with the Riksbank projected path and much weaker than they would have expected a few weeks ago.
- Is there a need to cut rates for other economic reasons? No. Quite the opposite, as credit growth remains strong and the Riksbank continues to highlight the risks related to excessive household indebtedness.
- Will other central banks cut rates leading to SEK strength? Quite possibly, and this is probably the best reason to expect a Riksbank rate cut at some point. However, with the Riksbank highlighting the possibility of intervention to control currency strength, there is less reason to expect them to use rates if there aren’t other reasons for a rate cut. The ECB may well cut rates next month, in which case the SEK may well strengthen, but there is no need to pre-empt this, as the outcome is unknown. The Riksbank may allow some currency strength or may choose to try and control it with intervention rather than a rate cut.
All in all, I see no reason for the Riksbank to hurry into a rate cut. Of course, they have shown a recent history of extreme dovishness, but the strength of the economy, high household indebtedness, strong credit growth and their apparent willingness to use intervention to control the currency if necessary suggests to me there is no intention to move unless inflation clearly weakens significantly. Surely it is better to wait until they have the January inflation data and have seen the ECB action and the currency reaction? A cut now would be a panic measure related to market turmoil. It is of course possible (most people are forecasting it) but that makes the minority view of no change all the more attractive for SEK bulls like myself.