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Swedish Rate Wrap

Swedish Rate Wrap — Stronger krona no obstacle to rate hike

Remarkably, this week's inflation figures managed to land close to both the market's and the Riksbank's expectations. Even so, we saw the largest daily strengthening of the krona in conjunction with CPI results since 2013 (Figure 1). As we see it, this strengthening is a reaction to an unjustifiably steep decline in the wake of the Riksbank's repo rate decision. Backed by inflation figures that are in line with the Riksbank's forecast, and the minutes from the Riksbank's April meeting, the signals are growing stronger that a rate hike really will be introduced this year. We expect the increase in interest rates at the short end to continue, and repeat our forecast of a hike in December.

We also consider the size of the initial repo rate hike, which is back on the agenda this week following responses from the Riksbank Executive Board members to questions from journalists. Although we see few economic reasons to deviate from the standard 25bp steps, we do not preclude a smaller repo rate hike as a compromise solution.

Claes Måhlén, Chief Strategist | clma02@handelsbanken.se

Swedish Rate Wrap — Riksbank expects the SEK to strengthen at record pace

As expected, the Riksbank adjusted its repo rate path to indicate an initial repo rate hike in December rather than September. Its inflation forecast was revised both up and down. The more remarkable story was instead the Riksbank's view of the Swedish krona. Its forecast for the trade-weighted KIX index was an increase of more than 2% on current levels during the second quarter, and of more than 4% by the third quarter. Coupled with a modified formulation concerning the krona in its press release, the Riksbank now appears to be loosening the tight currency knot by removing the 'put' in the EURSEK, which we think played an important role in the weakening of the SEK. We get the impression that the Riksbank is not interested in the SEK becoming even weaker. Given our view of the inflation trend, we believe the decision by the Riksbank signals a rate hike before year-end.

Claes Måhlén, Chief Strategist | clma02@handelsbanken.se

Swedish Rate Wrap — Weak core inflation to lower the repo rate path

Weaker figures, primarily for the CPIF excluding energy, will in all probability prompt the Riksbank to lower its repo rate forecast at its monetary policy meeting in two weeks. In our view, major revisions are not warranted because the Swedish krona is markedly weaker than the Riksbank's forecast. We now expect the Riksbank to increase the repo rate by 25 basis points in December, instead of in September.

Claes Måhlén, Chief Strategist | clma02@handelsbanken.se

Swedish Rate Wrap — Market’s probability of a rate hike is too low

Weaker outcomes in leading industry indicators coupled with higher risk aversion are putting downward pressure on bond yields. There is a risk that the global PMI will continue to fall ahead, and even though it is still high, turning points tend to be indicative of the market. The risk that US bond yields will continue to fall has increased. Meanwhile, we are now at the lower end of the range for Swedish bond yields seen over the past few months. We will hold steady with our recommendation for short duration, but see potential for higher interest rates, especially at the short end of the curve.

Claes Måhlén, Chief Strategist | clma02@handelsbanken.se

Swedish Rate Wrap — September remains in play

Following January's low inflation, the CPIF ended up being marginally closer to the Riksbank's February forecast. We expect inflation to rise in March and the Riksbank's forecast error should completely disappear over the next couple of months. Although the market was disappointed following the January shock, we believe it is warranted to expect a continued rise in inflation ahead.

The market only sees a 35 percent probability of a rate hike in September, but we still believe September remains in play. Consequently, short-term yields should rise and the narrowing of the spread toward Germany should be reversed.

Kiran Sakaria, Junior Strategist | kisa02@handelsbanken.se

Swedish Rate Wrap — Headwinds mounting at the Riksbank

As we know, bad news tends not to travel alone. The inflation surprise in January was followed by weaker unit labour costs and continued low wage growth. The market's conclusion is that a repo rate hike will not come until December at the earliest. In this edition of the Swedish Rate Wrap, we review what would have to happen for our forecast of a repo rate hike in September to materialise.

Overall, there is a substantial risk that the Riksbank will ultimately be forced to lower its repo rate path in conjunction with its meeting on April 25, and thus signal a repo rate hike later than in September. However, the fact that the Riksbank opted not to revise its repo rate path in February, despite a lower inflation forecast, indicates a certain willingness to start raising the repo rate.

Claes Måhlén, Chief Strategist | clma02@handelsbanken.se