Riksbank Deliver Dovish 50bp Hike; EUR/SEK at 12 by Year-End

Summary

• The Riksbank delivered a dovish 50bp hike, with two of five policy members preferring a smaller sized 25bp hike.
• Core inflation is expected to return to target by Q1 2024 and likely needs to print in line with forecasts over April and May for a June pause to become a possibility. SEK forecasts are unrealistic, too.
• Focus is slowly turning to growth implications with contraction expected through 2023 and only mild positive growth forecasted for 2024.
• We expect the Riksbank to deliver a 25bp hike in June but think they have ultimately hiked too far.

Market Implications

• EUR/SEK could reach 12 by year-end.

Growth Suggests Slowdown, Price Pressures Leave Risk

The Riksbank delivered a 50bp hike, as expected. However, the overall tone was dovish. Just three voted for the larger move; First Deputy Governor Anna Breman and Deputy Governor Floden ‘entered reservations [page 4 of PDF] against the idea’. They favoured a 25bp hike on the back of ‘well-anchored inflation expectations’, ‘moderate wage increases’ alongside the ‘weak and downward-revised forecast for domestic demand’. They hedged their opinions and stated that 50bp hikes could return ‘if inflation pressures do not slow down sufficiently quickly’.

Core Inflation Needs to Print in Line with Forecasts for June Pause

Core inflation continues to provide ample reasons to remain hawkish, with core ‘much higher than expected during the first months of the year’. And, indeed, the Riksbank have made a great effort to note how difficult it is to predict the exact path of inflation.

So, with little easing to price pressures in the consumer stages of production, and a recent pick up in core inflation momentum, we think it is unlikely core inflation prints in line with forecasts (April: +8.6% YoY on 15 May; May: +8.1% YoY on 14 June; Appendix: Table 1, Charts 1 and 2). As a result, we think it is unlikely they pause in June.

Further afield, headline CPIF is forecasted to target by December 2023 with core inflation following back to target in March 2024.

Unrealistic SEK Forecasts

‘A stronger krona would be desirable’ given that it has contributed to ‘somewhat higher inflation’. They are forecasting for it too (Chart 3). However, their recent record is poor, while we think SEK is vulnerable – see market implications below (Chart 4).

An Impending Growth Slowdown

We have wanted to see a switch to growth considerations as an indication it may well be time to turn long EUR/SEK for the final leg higher. And, well, it appears to have leaked into the June meeting. 2024 GDP forecasts have been revised noticeably lower, to +0.2% YoY from +0.9% YoY, while the economy is still expected to contract through 2023 (-0.7%), albeit less than before (-1.1%; Chart 5).

The Riksbank estimates the labour market will feel some of impact too, with unemployment rising by 1.4pp from March’s 7.2% and the employment rate slipping 1.6pp from March’s 70.0% (Chart 6).

Market Implications

Markets appeared wrongfooted by Riksbank dovishness. Trade-weighted SEK weakened 1.2% following the decision as EUR/SEK raced toward recent highs of 11.40 and NOK/SEK rose back up above 0.97. Yields notched lower, too.

Looking forward, it is clear we have shifted closer to stage two, from stage one, in our EUR/SEK game plan. The Riksbank are attempting to move their focus to growth implications, and away from hawkish core inflation risks. Had the latter not beaten Riksbank forecasts so significantly, they would have shifted a while ago; their own research shows they would have to hike the policy rate to about half of what it was in early 2000s/GFC (a touch above 4%) to cause the same downturn in consumption growth (Chart 7). As a result, we could see a harsher economic fallout than currently expected. Financial outflows should follow, and EUR/SEK should find its next leg higher (Charts 8 and 9). We believe EUR/SEK could reach 12 by year-end.

Summary

In short, Governor Thedéen’s second meeting proved dovish. Two of five voters openly favoured a smaller 25bp hike on the back of the growth outlook and stabilising price pressures. However, upside core inflation risks remain and, thus, we continue to favour a 25bp June hike.

SEK felt the brunt of the dovishness falling at least 1% against its peers. With peak hawkishness now passed, the bullish case for SEK is slimming. And with considerations now turning to how deep a Swedish recession may be, we believe this may well be the start of the journey of EUR/SEK to 12.

Appendix

Ben Ford is a Researcher at Macro Hive. Benjamin studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively. 

Photo Credit: depositphotos.com

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