To us, the much lower than expected inflation rate in September was not a one-off. Our current forecast indicates that the October CPI data will be a massive 0.7pp (CPIF 0.6pp) below the current Riksbank forecast. Remember discussions from the last minutes:
“Monetary policy must ensure that inflation moves towards the inflation target reasonably quickly even if inflationary pressures prove to be surprisingly low going forward. In principle, this statement could justify an even lower repo rate than 0.25 per cent today.”
In a Bloomberg interview published on Monday, Per Jansson was quoted as saying:
“If it’s the latter [that the low CPI was not a temporary effect], then the likelihood becomes bigger that we will have to tackle this.”
Again it is evident that CPI is the prime target for Riksbank monetary policy going forward – and the outcome in September was a big disappointment. On top of that, our October forecast shows an even bigger deviation from the Riksbank’s current forecast. A discrepancy of 0.6% is huge, especially bearing in mind the history of Riksbank. Hence, we expect a soft Riksbank, a rate cut of (at least) 15bp in October (base scenario) and believe that a postponement of the first rate hike is on the cards. Our best guess, for the time being, is that the first hike will not come until the end of 2016 (our earlier assessment was summer 2016).
The outlook gives us reason to assess money market rates and given our rate scenario we see a 30-35bp (15bp or 20bp rate cut and first rate hike late 2016, 23bp fixing spread) value in the FRASEP16, but probably need a few basis points in term premia like in Europe, see next page. Not bad in the current environment. We recommend selling (receiving) SEP16 @ 0.645%. P/L: 0.40%/0.80%.
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