Market Mover - BNP PARIBAS - Investment Services India

On inflation, Riksbank’s language was hawkish
compared with the December statement. The
increase in inflation in recent months was noted.
Also, the expectation of weak wage increases was
perceived to “help reduce inflationary pressures in
the period ahead”. This is a marked change from the
emphasis on the “downside risks to inflation” in the
December statement.
Revisions to Riksbank’s forecasts
In terms of revisions to growth and inflation
projections, the GDP growth forecast for this year
has been revised down from 2.7% to 2.5%. Inflation
forecasts for 2010, on the other hand, were revised
upwards in light of the surprises on inflation. CPI was
revised up from 0.8% to 1.6%, hence why the
Riksbank now expects to deliver its first rate hike
earlier, and CPIF from 1.2% to 1.9%. 2011 forecasts
were revised down only by 0.1pp for both CPI and
CPIF (to 2.9% and 1.4% respectively).
Chart 3: GDP and Unemployment
Source: Reuters EcoWin Pro
Chart 4: Riksbank’s Policy Projections in
December 2009 & February 2010
Dissenter to the decision
This time around, there was only one dissenter to the
decision. Deputy Governor Lars E.O. Svensson once
more entered a reservation against the decision and
advocated cutting the repo rate to 0%. Deputy
Governors Lars Nyberg and Barbro Wickman-Parak
clearly did not dissent to today’s decision as the
outcome was in line with their long-held view that ”it
would be necessary to raise the interest rate sooner
than indicated by the proposed interest rate path, but
that the path would then not need to be so steep
during the remaining forecast period”.
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Repo Rate (%, quarterly averages)
Dec-09
Feb-10
Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412
Our policy expectations
Last week we highlighted that the further
improvement in domestic economic conditions does
provide a reason (see Market Mover, 5 February
2010) for the Riksbank to bring forward its projection
for the first rate hike from the autumn to the summer,
i.e. from September to July. We also noted that there
is already disagreement among the deputy governors
regarding growth prospects, with deputy governors
Nyberg and Wickman-Parak having a more positive
view on the growth outlook, which would necessitate
earlier rate hikes than forecast by the Riksbank.
But, given the tensions in financial markets and
increased uncertainty due to concerns over the fiscal
situation in high-debt countries, we expected the
Riksbank to adopt a cautious approach this time
around and keep its repo rate path unchanged for the
time being.
Source: The Riksbank
The Riksbank, however, seems to be more certain of
the growth outlook, given the further improvement in
economic conditions since the December meeting.
Therefore, we believe the first rate hike will come in
July, as economic conditions should continue to
improve and the increase in unemployment is likely
to be less than generally expected by the Riksbank
previously.
However, if stress in financial markets intensifies on
the back of concerns over the sustainability of fiscal
balances in some countries and uncertainty
increases, there is a risk that the Riksbank will wait
until September to start its hiking cycle.
Gizem Kara 12 February 2010
Market Mover
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