Better inflation recovery necessary for the Riksbank to turn hawkish

Sweden inflation data are due out (Tuesday, 09:30 CET) and expectations are for the outcome to come in just a tad below what the Riksbank is estimating. A weakening of the Swedish crown since the latest rate decision is making it easier for the central bank to push up inflation. However, Trump-victory increases uncertainty on the economic outlook and does not change Riksbank outlook for more measures being in the pipeline.

“October’s CPI reading (released Tuesday) looks set to disappoint the Riksbank forecast. A second consecutive inflation disappointment could lead the market to price a possibility of a Riksbank cut," said Nomura in a report.

The minutes of the October meeting released last week showed that the Riksbank Executive Board is concerned over the inflation outlook and that more easing measures are in the pipeline. With the weaker SEK, headline inflation is moving closer, but will nevertheless not reach the central bank's 2 percent target. Riksbank needs a weak SEK to boost inflation.

That said, there are probably also limits to how weak the SEK may go. Riksbank probably needs around 5 percent weakening per year for inflation to stabilise at or above 2 percent. This is neither likely nor desirable as the more the SEK ticks weaker, the greater will the future deflationary impulses be when the SEK starts to strengthen again.