Riksbank’s September meeting minutes’ tone came in hawkish, probability of hike in December rises

Riksbank’s September meeting minutes came in slightly more hawkish than anticipated as the dovish majority of the board does not rule out a rate hike around the turn of the year. The main reason is that Governor Ingves says that “a cautious normalization of monetary policy is approaching”. Ingves stated that on the back of stronger economic development it is reasonable for Sweden to have slightly higher interest rates than in the euro area, and “despite the presence of downside risks, it is now time to announce a test of that hypothesis later on”.

Moreover, Jansson is a bit more hawkish than anticipated. He continues to focus on core inflation and service inflation in particular, but does not rule out a rate hike in the near term. Jansson indicated that if the projection is about right, “my sights are now firmly set on it being possible to implement the first rate rise in either December or February”.

There is a possibility that Flodén might vote for a rate hike in October, while Skingsley said that a rise in December appears to be the first feasible opportunity while October is not an option. The most dovish member on the board is Af Jochnick; however, he does not rule out a rate hike in December or February. Ohlsson supports a hike in rate during September meeting.

The central bank has had some bad news since the September meeting. Inflation has again come in below the central bank’s view, while GDP growth has been downwardly revised and labor market parties wage expectations are record low according to the Prospera survey. Timing about the revision of the central bank’s inflation forecast would be significant.

“Our forecast is in line with the Riksbank’s view until mid-2019. But the Riksbank will realise that inflation will drop back next year as the expected rise in core inflation will mainly be a temporary uptick in goods inflation on the back of the weak SEK”, added Nordea Bank.

Services inflation has bottomed out and might begin accelerating from here, but not enough for total inflation to be steady at target levels. Therefore, the central bank is expected to downwardly revise its inflation projection in the coming reports. Furthermore, GDP growth is expected to decelerate going forward, sweeping away grounds for a rate hike.

According to Nordea Bank, a first rate hike is still a long way off, but the possibility for a rate hike in December or February has increased.