Riksbank likely to adopt first rate hike by mid-2018, says Commerzbank

Swedish inflation rates surprised markedly to the upside in July. The headline rate rose to 2.2% on the year, the core rate (with constant mortgage rates) to 2.4 percent. Both rates are thus moving above the inflation target of 2 percent. Looking at the underlying trend, the Riksbank will not be able to maintain its forecast of 1.6 percent for the 2017 headline rate, even if it assumes a relatively weak trend for the rest of the year.

It will have to revise its forecast upwards in the direction of 2.0-2.2 percent at its next meeting. At the same time, it could already signal that it will not extend its asset purchasing programme beyond the year-end.

The Riksbank has often surprised to the dovish side of late. It wants to avoid the interest rate differential to other central banks – first and foremost, of course, the ECB – from widening too much, as this could cause the SEK to appreciate too quickly and too strongly, which would worsen the inflation outlook again. The three-year trauma of too-low inflation near the zero line despite strong growth should weigh heavily.

"It is therefore likely that the Riksbank will tolerate a temporary overshooting of the inflation target rather than running the risk of inflation turning into what is, in its view, the wrong direction. It wants to make sure that inflation expectations remain anchored on a sustainable basis," Commerzbank commented in its latest research report.

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