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50bp cut and first rate hike in Q4 2015 (0.40 average for quarter). Rate trough at 22bp in Q4 2014, indicating 12% probability of another rate cut . Inflation forecast lowered but August CPIF at 0.28%, could have been even lower. Ingves and af Jochnick opposed the rate decision in a unique voting outcome. The market needs to price a curve higher than the Riksbank’s for 2015, perhaps indicated 50% probability of a rate hike by mid-2015. The decision will increase pressure on the FSA to counter this impulse into the housing market and the Riksbank press statement says that they want measures aimed directly at the households' demand for credit.
Riksbank cheat sheet: Three things to watch Thursday.The prime focus will be on the rate path.
First, where is the trough in rates? We think a market neutral level would be 46bp in Q4 2014, suggesting a 16% probability of another cut. In April, the rate path troughed 10bp below the repo rate level (i.e. 40% probability). If that was to be repeated, the market would probably price 15-20bp of a rate cut (compared to 8bp at the moment).
Second, when is the first rate hike? In April, the first hike was indicated early Q2 2015. We think Q4 2015 would be market neutral, but remember that the market is pricing Q1 2016. We expect the market/Riksbank gap to remain huge with the Riksbank’s path remaining much steeper than the market is pricing.
Third, of high importance, but perhaps initially disregarded by the market tomorrow, will be the forecast for near-term inflation. The trough in CPIF inflation is likely to occur in August before base effects push inflation higher. The Riksbank’s April forecast sees August CPIF at 0.5% yoy. An August forecast at 0.1% or below (i.e. 0.4 ppt lower) tomorrow would make it very difficult for inflation to surprise on the downside in the near term. In absence of another inflation surprise the Riksbank will not need to cut rates further.
As far as the actual rate decision goes, we think a 25bp rate cut has an 89% probability. A 50bp cut 10% and unchanged 1% probability.
In order to gauge what will happen with the inflation forecast we take the revision of December-13 as a starting point. At that meeting the Riksbank also cut rates by 25bp due to lower-than-expected inflation. One may argue that a smaller revision is called for this time as the inflation undershoot is smaller and the SEK has been much weaker (on average 4% weaker than the April forecast). On the other hand, the longer inflation remains subdued the more likely the Riksbank is to change the view on underlying inflation pressures
The Riksbank is likely to come up with the lowest short-term inflation forecast (chart shows compared to NIER). The Riksbank will not want to end up with another downside suprise in the near term, forcing them to cut rates yet again
A similar approach for the repo rate forecast, i.e. we use the December revision as a template for this week’s meeting