Riksbank hike leaves limited room for further krona gains

The Riksbank raised its policy rate by 25bp to 2.00% on 4 November, in line with our call, and reaffirmed September’s guidance that further hikes are likely over the coming year.

The krona had already gained around 3% against the euro between the September guidance and today’s decision. With markets pricing in a 48% chance of another hike in December and 38bp of cumulative tightening by March, Swedish rate expectations leave little room for further SEK gains. We forecast EURSEK at 11.00 in one month.

The case for today’s hike rests on demand recovery. Preliminary figures show Swedish GDP grew 0.4% QoQ in the third quarter, with strong household consumption and rising employment.

Producer prices have risen rapidly even outside energy, and more firms than usual plan to raise their selling prices. Stronger demand makes it easier for them to pass on those costs. The Riksbank expects that combination, reinforced by the krona’s weakness earlier this year, to push both headline and underlying inflation above 2% next year.

September’s inflation figures give the Board room to judge how quickly that is happening. CPIF inflation matched its forecast at 1.5% YoY, but energy prices rose faster than expected while food and services prices rose more slowly.

Adjusting for temporary fiscal measures put inflation at 3.0%. Excluding energy as well brought the Bank’s preferred underlying measure down to 1.6%, slightly below forecast. Persistently higher oil prices could bring the next hike forward. A prolonged post-election deadlock pulls in the other direction, particularly if a caretaker budget limits fresh support for domestic demand.

For SEK, the bar for further gains is highest in March. Markets price in around 17bp of tightening through February and a further 21bp at the March meeting alone.

If firms pass on costs more slowly than the Board expects, investors could push back the timing of further hikes, leaving the krona vulnerable even as the Riksbank continues to tighten. We therefore forecast EURSEK at 11.20 in three months and 11.30 in six months, before the krona recovers some ground to 11.10 at twelve months.

Author:

Barry van der Laan MBA, Senior FX Market Strategist

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