Executive Board split regarding new measures
At first sight, there was nothing particularly remarkable about the Riksbank's final monetary policy decision for 2016. The repo rate is unchanged and the Riksbank will continue its bond purchases for another six months. However, if we consider that the Executive Board was totally split regarding the decision to make more bond purchases (two completely against and one in favour of half the amount), and that the possibility of more measures between the meetings is being removed, the tone is definitely more hawkish than expected.
We retain our view that the Riksbank has completed its monetary policy interventions. We believe the repo rate will be raised on the first occasion in H1 2018 and no further bond purchases will be decided. Concerning the repo rate, however, the risk scenario is tilted toward an increase toward the end of 2017.
Central banks will continue setting the tone in 2017
The central banks and monetary policy have been in the driving seat of economic developments for a number of years and their activities will continue to set the tone during 2017. The Fed will continue its tighter monetary policy, although focus in the US will be on future fiscal policy. The fact that the ECB has signalled an extension of its QE programme indicates that it will continue to be a central player in the European bond markets.
Now that the ECB has stated that its bond purchases will continue throughout 2017, we are more convinced than previously that the Riksbank will continue its own bond purchases. This is insurance against the krona strengthening too quickly and too strongly. However, there are a few aspects which mean that we cannot completely rule out a lower repo rate. For more details, see page 4.
Continued steepening in sight
We saw huge interest rate movements in the aftermath of the US election, and this trend has continued. The Fed's re-pricing has been clear and the market is starting to approach two rate hikes in 2017. An increase in December is a dead certainty. The market is thus moving toward the Fed's own interest rate forecast. We see knock-on effects in the Swedish market and consider there to be scope for a steeper Swedish curve, which is supported by the increasingly strained labour market.
There continues to be a major, widespread shortage of dollars after the changed rules for US money market funds which took effect on October 14. The question is how far the Fed and other major central banks will allow this to go before they again start to utilise the facilities that are still available since the major financial crisis eight years ago.
Broad mandate results in higher inflation and higher interest rates
With Trump in the White House and a Republican majority in Congress through clear election results, it is reasonable to assume that a relatively large number of election promises will become reality. While the details remain ambiguous, a growth surge and positive inflationary impulse are likely to ensue, though the timing of these effects may be uncertain. The Fed will hike the Funds rate in December and long yields will continue to climb. However, all this assumes that the current lack of pronounced stress in the global financial markets will continue.
We are approaching the Swedish October inflation report. For the Riksbank it is crucial to avoid another negative surprise. We do not believe there will be any such surprises, and Swedish inflation will be significantly higher in one year compared with today. The Riksbank is expected to leave the repo rate unchanged in December. Nevertheless, we retain our view that the Riksbank will extend its bond purchase programme during the first half of 2017, as insurance against a sharp appreciation of the krona.
More bond purchases but unchanged repo rate ahead
Despite a Riksbank decision that was in line with our expectations regarding actual policy decisions, the tone of the communication was definitely dovish. In principle, the Riksbank is promising to extend its bond purchasing programme beyond year-end, while simultaneously signalling a high probability of a lower repo rate. We look at the arguments and conclude that at its December meeting, the Riksbank will extend its bond purchases by SEK 30 billion, with purchases taking place during the first part of 2017. However, an Executive Board with differing opinions will leave the repo rate unchanged.
One low monthly figure is not enough for new measures
September's monthly inflation figure was a surprise for most people, but probably most of all for the Riksbank, which was expecting 0.4 percent higher in CPIF terms. A year ago, a similar outcome would have resulted in a policy response (chart 1). It is certainly a reason for concern prior to the monetary policy meeting in October, but our definite opinion is that it does not call for a change of direction in monetary policy at this stage. The situation is totally different from last year. The Riksbank has managed to exceed its goal in terms of a weak currency and can afford to wait for additional information before the December meeting. That information will be in the form of two further inflation outcomes: a "major" Prospera survey about inflation expectations and the December ECB meeting.