The Riksbank went a bit further than we expected by cutting the repo rate to zero but it was in line with our expectations in terms of postponing the first rate hike to mid-2016. It also said that if inflation does not rise, the first option is to postpone it further. Presumably this means going for an almost flat path at some point.
The Riksbank is entirely focused on inflation and pulled down the CPIF path mostly in 2015 as can be seen in the chart below. Comparing this to the repo rate path, the Riksbank basically says that CPIF inflation needs to reach the 2% target before the first hike is triggered.
There are other measures in the toolbox, ranging from outright purchases, long-dated fixed repos and FX interventions, but there is nothing suggesting a preference at this instant. The deposit rate is now also at 0%, thus the corridor has been abolished. We see no reason to alter our recommendations. We continue to be long in the short end, by receiving FRA SEP16 outright with a target of 0.4%. We also like to flatten 5Y-10Y in SGBs as the hunt for yield will intensify. Also, short end BEI spreads could gain support from the clear focus on inflation. We hold on to the box in BEI3102 while receiving 2Y 2Y fwd.
Near term we expect EUR/SEK to remain supported ahead of the high from 3 July 2014 at 9.3887. Medium term we expect EUR/SEK to head lower on Swedish growth outperformance relative to the euro area. In addition, we believe that the SEK is fundamentally cheap at current levels. In this regard, we note the comment from the Riksbank that ‘if MP needs to become more expansionary, this would primarily entail postponing a first increase of the repo rate’. This supports our view that the Riksbank is unlikely to impose a floor under EUR/SEK (See Riksbank floor under EUR/SEK, 24 October). We maintain our 1M and 3M EUR/SEK forecasts at 9.20 and 9.10.
To Read the Entire Report Please Click on the pdf File Below