Printer Friendly

eMail Article

March 30, 2007

Sweden's Riksbank Continues To Sound Sanguine But Rates May Need To Go Up Faster Than Anticipated
by Victoria Marklew

As expected, the Riksbank today left its key repo rate at 3.25% and struck the same relativelydovish tone that it adopted after February's 25bp rate hike. The bank once again noted that, "over the coming months the repo rate will need to be raised by 0.25 percentage point ... After that it will probably be possible to pause before making a further increase." The bank published its rate path forecast for the first time in February, indicating that it expected the repo rate to be at 3.5% by the end of this year, nudging upward to average 3.6% in Q1 2008 and 3.7% in Q1 2009. However, we think the path of tightening will end up being a little steeper.

The Riksbank targets underlying inflation (UND1X, ex-indirect taxes and interest rates) of 2.0% over a two-year forecast horizon. As we've noted before (see Daily Global Commentary, December 15: Sweden's Riksbank Continues On Its Tightening Path), although UND1X remains well below this level - coming in at just 1.3% in February - the Riksbank is concerned with where inflation will be two years from now. There are some signs that inflation may be starting to edge upward, with the headline rate reaching 2.0% last month. Hence, the central bank's forecast for gradual tightening.

In today's announcement the Riksbank warned that wage deals may fuel inflation. Indeed, industrial workers inked a bigger-than-expected three-year pay deal earlier this month and retail workers just did the same. The labor market continues to tighten, with the (unadjusted) jobless rate falling to 4.8% in February from 5.3% in January. The central bank had been assuming that an expanding labor supply would help to keep some slack in the job market and reduce inflationary pressures. While the labor force has been rising in recent months, February's 4.646 million was up only 1.15% on the year-earlier level, which does not seem like enough of an increase to keep inflationary pressures from other sources in check.

Overall, the economy is downright robust. Real GDP growth jumped 1.2% on the quarter and 4.7% on the year in Q4, taking 2006 growth to 4.4% - the fastest since the dot-com boom year of 1999 and the second-fastest since 1970. Evidence so far from the first quarter suggests that this pace continues. Business confidence remains strong and retail sales, though volatile, remain at a high level. The National Institute for Economic Research just raised its forecast for economic growth to 3.9% this year and 3.4% in 2008. The government is a tad more cautious, with growth forecasts of 3.7% and 3.3%, respectively. The Riksbank's latest forecast is for 3.5% growth this year slowing to just 2.9% in 2008 - we suspect these numbers will be revised upward in the coming months.

Meanwhile, with the fiscal surplus reportedly rising steadily as the booming economy generates strong revenue growth, Finance Minister Borg said recently he would consider additional income tax cuts in the 2008 budget. Coming on top of this year's cuts, that would give an additional kick to domestic demand going forward - something the central bank will likely take into account as it prepares its next set of interest rate forecasts (which will be included in the second Monetary Policy Report of the year, to be released June 20).

We suspect that, if the labor market and growth data continue on their recent trajectory, the Riksbank will sound a little more hawkish at the May 3-4 policy meeting, and will hike the repo rate to 3.50% on June 19-20. How soon the next tightening comes will depend on the data.

Victoria Marklew
The Northern Trust Company
Economic Research Department
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Copyright © 2005-2008 The Northern Trust Company

Image rendition and html coding Copyright © 2000-2008 SafeHaven.com

« BullionVault.com -- Buy gold online - quickly, safely and at low prices »
« Honest Money: A History of U.S. Gold & Silver Currency -- by Douglas V. Gnazzo »

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »