Riksbank October minutes indicate rate hike timing uncertain, but may hike in December

The minutes of Riksbank’s October meeting indicate that the first rate hike’s timing remains undecided and that the Executive Board is split. Furthermore, the central bank does not appear to be confident about the inflation outlook.

The Swedish central bank had kept the repo rate on hold at -0.50 percent, while the rate path was kept unchanged. There were no changes announced for the QE program. For some time, the Riksbank has hinted at a rate hike around the turn of the year. It is likely that the central bank will hike its rate in December, noted Nordea Bank in a research report. Nevertheless, the monetary policy report and today’s minutes indicate that the timing is uncertain.

Flodén and Ohlsson are mostly expected to vote for a rate hike in December, while the other four board members have not yet decided whether to go for higher rates in December or February. Governor Ingves stated that the developments would have to be followed until December and then decide what would be the most appropriate decision. Ingves also highlighted that “rate rises, when they are initiated, will be implemented at a slow rate compared with previous rate-rise cycles”.

Today’s minutes, and also the monetary policy report, struck a slightly dovish tone as the central bank is worried about the inflation and the growth outlook. This is highlighted by the hesitance regarding the timing of the first rate hike, stated Nordea Bank.

Governor Ingves stated that through well-integrated markets for goods and services, international price developments impact Swedish inflation. Ingves said that the moderate underlying inflationary pressures abroad, “particularly in the euro area, are an uncertainty factor. But in the wake of rising resource utilisation abroad, underlying inflationary pressures are expected to rise”.

Overall, core inflation is expected to accelerate in months ahead in line with the central bank’s view, said Nordea Bank. This underpins the view of a rate hike around the turn of the year, possibly in December.

“Longer out, inflation will start to drop back, the inflation outlook will deteriorate and GDP growth will slow, preventing the Riksbank from continuing to normalise monetary policy according to our forecast. We see a second rate hike in December 2019 when the ECB takes a first step”, added Nordea Bank.