SEK, NOK: Scandies narrowly on hold

The Riksbank is expected to keep policy unchanged but retain an easing bias (Tuesday). The uninspiring ECB meeting and the prospect for a "higher-lower-bound" in euro area rates, have alleviated near-term pressure for the Riksbank, contrary to the earlier expectations. As a result, no longer expect a 10bp rate cut and instead the Bank is expected to adopt a "wait-and-see" stance as it assesses potential future policy actions by the ECB. 

The Riksbank's decision should be assisted by strong domestic data, with the bank focusing on the trend of inflation rather than last week's weaker-than-expected CPI print. With the Swedish interest rate market pricing a 40% chance of cut, a no-change decision should support the SEK.

Also narrowly favor an unchanged policy decision by the Norges Bank (Thursday) despite the recent drop in oil prices. Economic developments since the September MPR have been broadly consistent with the bank's projections. Yet inflation has recently surprised to the upside, and despite the long held hypothesis that the bank is willing to tolerate a modest inflation overshoot, it will not want to actively fuel a weaker NOK and higher inflationary pressures further ahead. Instead, it is expected to wait until Q1 2016 before delivering a 25bp cut in the context of lower oil prices. Its most recent forecasts already incorporate further rate cuts of about 15bp over the forecast horizon, providing a clear signal that looser policy may be necessary.