Riksbank Preview: 25bp Hawkish Hike

Summary

• We expect the Riksbank to hike by 25bp to 3.75% and to revise their projected terminal rate to around 4%. We ascribe 20% chance to a 50bp move.
• GDP was stronger than expected in Q1, but the details revealed a weak consumer.
• Unemployment is lower than forecasted while the Riksbank’s labour market indicator has pushed to new highs. However, Swedish wages will only increase moderately over the next two years.
• Core inflation has finally fallen in line with forecasts.

Hawkish 25bp to Protect SEK

The Riksbank appear to have panicked too early. Through the latter stages of 2022 and early stages of 2023, core inflation had beaten Riksbank forecasts and left the hawks of the board singing. However, by Q2 2023, the Riksbank had finally got a handle on inflation forecasts with inflation coming in line with forecasts. As a result, the doves of the board finally had a foot to stand on. The Riksbank turned their worries to downside growth risks. However, key data has remained strong, despite some softer details.

Strong Growth Headline Hides Weaker Details

The Swedish economy expanded +0.6% QoQ through Q1 2023, double what the Riksbank had forecasted (Chart 1). Stronger exports (contr.: +0.66pp.) and inventories building (contr.: +0.57pp.) drove the beat. Positivity has come in line with the Economic Tendency Survey confidence indicator stabilising – it suggests a far stronger outturn than forecasted in Q2 2023, too (Chart 4). However, the consumer proved extremely weak through the period (contr.: -0.5pp.), and despite a small flurry of strong readings in retail sales and household consumption, the trend remains weak with the Riksbank Business Survey confirming as much in the retail sector (Chart 3). This should force some caution from the Riksbank.

Strong Employment, Moderate Wages

The labour market has done better than expected; unemployment averaged 7.1% SA through Q2 against a forecasted 7.5% (Chart 5). Meanwhile, our take on the Riksbank labour market indicator shows a strengthening labour market (Chart 6). However, the Swedish wage formulation model has led to a moderate wage increase following the two-year collective wage agreement. In short, labour market strength is not as inflationary as it could have been, and the Riksbank has acknowledged this.

Correctly Forecasting CPI (For Once)

The Riksbank had a torrid time forecasting inflation (who hasn’t). However, they have finally had a bit of good fortune. Core inflation (CPIF excluding energy) fell to 8.4% YoY in April (versus +8.6% YoY forecasted) and then +8.2% YoY in May (versus +8.1% YoY forecasted; Chart 7). Thus, it is hard to argue for a more hawkish outing from the Riksbank this week based on core inflation.

Looking forward, we find that rents inflation (9.7% of CPI; 41.2% of housing CPI) will fight disinflationary house price pressures (9.5% of CPI; 40.6% of housing CPI), goods inflation will continue to decline in line with PPI, and services inflation will find comparative (versus other DM nations) respite thanks to a ‘moderate’ wage increase (Charts 8 to 12).

Summary

The Riksbank are concerned about downside growth risks. And, despite impressive outturns in GDP and the labour market, the consumer ultimately remains weak with demand faltering. Meanwhile, wage pressures have proven ‘moderate’ while core inflation has printed in line with forecasts. The Riksbank likely deliver a 25bp hike with a hawkish tone. We expect they revise their terminal rate higher, too. We ascribe 20% to a 50bp move.

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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