Next week marks the first Riksbank meeting since December’s decision to hike the repo rate by 25 basis points and return policy to 0%.
While the central bank signalled heavily that the return to zero would occur in either of the December or February meetings, the decision to hike rates sooner rather than later wasn’t unanimous.
Both members Jannson and Bremen decided that December was too premature to hike rates, with inflation expectations moderating and weak economic activity, while Flodan was in doubt but sided with the majority to avoid further SEK weakness.
The decision to return to zero, in order to stem financial vulnerabilities associated with negative rates such as housing bubbles and unsustainable debt levels, was considered a blow to the negative rate narrative.
Sweden is arguably the best natural experiment of negative rates and while inflation returned to the 2% target in a low inflationary environment, the Swedish economy didn’t show the resounding pick up many would have imagined when the zero lower bound was breached some five years ago.
The jury will be out regarding the relative success of negative rates for some years, but Governor Ingves nicely wrapped up the Riksbank’s stance on the matter when he stated “a zero policy rate is a better vantage point than a negative policy rate”.
The move towards a proactive and risk management style in monetary policy frameworks is in fashion in developed markets, with the Federal Reserve trail blazing last year with insurance rate cuts.
The Swedish economy since the December meeting:
- Inflation fell at the margin in December but the overall headline figure sat steady at 1.7% due to rounding effects. The CPIF reading fell 5 basis points to 1.66% when measured by two decimal places, suggesting the rebound in inflationary pressures may only be short-lived. The stabilisation was predominantly due to higher transport prices, more specifically international flights, while housing costs and food products dragged substantially. Services price inflation, which is viewed by the Riksbank as a key measure of domestic inflation, rose 4 basis points to 2.7% YoY while goods price inflation was unchanged at 1.3%. Overall, the CPIF figure was in line with the December projections. A recent staff memo, however, outlines that Statistics Sweden depresses national inflation figures more aggressively than European counterparts – an argument that will likely provide Governor Ingves a get out of jail free card should inflation readings slump again in H1 2020.
- The KI/ NIER Economic Tendency Indicator, a key expectations measure in Sweden, rose by 3.6 points to 97.1. The reading marked the potential start of a rebound in sentiment in Sweden after a broad decline since September 2018. The rebound was driven by the manufacturing sector, while retail sales and construction also continue to contribute positively. However, consumer confidence and private-sector services measures continue to weigh on the overall figure. The rise in manufacturing confidence bodes well for a pickup in European industrial activity seeing as Sweden’s manufacturing share of output is higher than most other comparable countries, considering it specialises in producing early sector inputs.
- The PMIs paint a lightening picture also. The January composite reading of 52.5 was the highest print since August. The services PMI rose by 3.4 points to 52.5, with the details also looking strong as employment and new orders sub-indices also rose.
- The strong survey data paints a picture of a resurging economy in the early parts of 2020, with Goldman Sachs current activity index rising to 1.1%.
- The krona has depreciated 1.08% on a trade weighted basis and 0.86% against the euro since the December meeting despite this stronger narrative. While this is predominantly due to the risk environment shifting because of coronavirus fears, the krona’s relative strength remains supportive for growth and inflation dynamics going forward.
Chart 1: Recent data points to a rebound in Sweden’s growth
Chart 2: Repo rate projections likely to rise as Q1 2023 is added to the forecast range
*To be released on Wednesday 12th February 2020
Author: Simon Harvey, FX Market Analyst at Monex Canada.