After last week’s decision to drop the FX intervention mandate and stick with the rate path, this week’s inflation data could be interesting. Ingves has a speech scheduled as well.
That’s from our traditional Sunday evening week ahead preview and the reference there was obviously to the Riksbank which last week decided to lean a bit hawkish despite the global pivot to dovish monetary policy in the face of mounting headwinds to growth.
Well, we got the inflation data on Tuesday and it was indeed “interesting”, where that means CPIF missed the lowest estimate, printing just 2% YoY versus the Riksbank’s 2.4% prediction. “Seasonal volatility” or no, that’s a huge miss.
Not to put too fine a point on it, but that’s exactly what we were trying to warn about last week when we gently suggested that now was not the time for Sweden to try and be a hero (so to speak) by sticking to the rate path in the face of clear risks to the outlook and the makings of a coordinated relent from the central bank’s global counterparts.
If the Riksbank (which hiked for the first time in seven years in December) thought they were going to be able to hike this year, those hopes may well have been dashed on Tuesday.
The krona of course plunged on the news because unless the Riksbank is insane, they won’t try to hike again in the face of falling inflation and against expectations of further dovishness from the Fed, the ECB, the BoJ and the RBA. Here’s a handy annotated chart that shows today’s move (the biggest decline in eight months) and last week’s rally following the (relatively) hawkish slant.
Here’s the bigger picture:
In theory, you could argue it’s going to take more than one lackluster inflation print to deter the Riksbank, but an admittedly simple read on this is that hiking later this year against a backdrop where the ECB ultimately pushes their first hike further into the future and/or moves ahead with something else dovish in order to bolster the eurozone economy seems like a complete non-starter. That would risk unwanted krona appreciation in the face of already weakening inflation. It’s hard to imagine that being a tenable/viable proposition.
In any case, we just wanted to highlight this as a followup to last week’s post and with all of the above in mind, we’ll leave you with a couple of excerpts from Nordea’s postmortem:
The reason to the lower than expected January reading is that the effect of the weak SEK is not kicking in. This is reflected in lower than expected prices for foreign travel, lower prices for clothing and footwear. Also, food prices declined while we had expected them to rise partly due to the weak SEK.
The imported inflation may bounce in the coming months, but the very low January reading underlines that cost pressures are low and much lower than the Riksbank’s view.
The effect of the changed basket is -0.1% point on the year-on-year figure, which was lower than we had expected. This will pull down the year-on-year figure throughout 2019.
Our long-held view is that the Riksbank will not see any domestic reasons to hike rates the coming years on the back of the inflation and growth outlook. Today’s inflation number reinforces that view.