As expected, the Riksbank has chosen to hold its policy rate at 2.0%. This decision follows careful consideration of current economic conditions and market consensus regarding future changes to monetary policy. The Federal Reserve’s September meeting will be one of its most historic and pivotal. They will set forth new forecasts that are sure to drive the ongoing economic narrative.
In the run up to this meeting, Riksbank would get one last August inflation print on Sep 4th. This information will provide critical context leading up to the meeting in September. What’s likely — during this meeting — is a notable recalibration in the new-found hawkishness of officials’ interest rate plans. The June Monetary Policy Report (MPR) telegraphed the idea of a 1-2-3 policy rate cut plan. It now forecasts a final drop of 12 basis points, split equally among the other four meetings left in 2023.
And while the market continues to react to the implications of the Riksbank’s actions, the reactions have been pretty tepid. Current pricing indicates that the September meeting is seen as a near 50/50 chance for an 11 basis point cut. At the same time, the November meeting is currently priced to a cut of 10 basis points. Despite this volatility, rates-implied fair value is about 11.15.
The Riksbank is expected to publish the minutes from its last meeting on August 26. These minutes will provide insight into the debate and deliberations that informed their decision-making, but don’t call the vote just yet. The timing for the next increase, and further rate increases thereafter, remains uncertain. This could increase the volatility around market expectations.
We look for unchanged core inflation, at roughly 3.0% y/y. This trend, marked in green below, is expected to stick around through the end of the year. This outlook is fundamental to judging the Riksbank’s monetary policy. Even more importantly, it gives us insight into its effects on the long term growth and stability of Sweden’s economy.
Market analysts suggest that the EUR/SEK currency pair is seen as a strategic buy on dips, indicating confidence in the Swedish economy despite current uncertainties. The effect of the recent Swedish inflation forecast, published August 14, has further shaped conventional wisdom. It does provide a useful framework to understand what may be in store for inflation and consumer prices in the years to come.
Investors and economists alike hang with baited breath on the Riksbank’s announcements and explicit guidance. They accomplish all of this while operating under the constantly changing economic landscape. The next few data releases and one important FOMC meeting will have an outsized impact on expectations. They will continue to steer investment choices for politicians, bureaucrats, and other stakeholders both domestically and internationally.