SEK: Why we think the latest strength is not to be trusted | Article
This week, Governor Stefan Ingves and Deputy Martin Floden firmly reiterated the view that the rise in underlying inflation (measured by the CPIF in Sweden) will not be sustained and the effect of temporary factors, such as higher energy prices, should subside sometime next year. They also suggested that the market has overreacted to higher inflation. As you can see in the chart above, the OIS curve shows 25bp of austerity priced for the next 12 months and 66bp for the next two years. We are currently expecting the first hike in 2023.
A crucial factor to keep in mind is that the Riksbank will only hold a policy meeting before the end of the year, 25 November. There will then be a big gap before the next one, on 10 February. In our opinion, November seems to be too early for the Riksbank to begin to become more hawkish and penalize an interest rate hike at any time below its forecast horizon.
This is most likely not because decision-makers actually expect to keep the repo rate at 0.00% until 2024, but because the markets will most likely read even a forecast increase in 2024 as a strong signal that the Riksbank is going to the sharp side of the spectrum. This may result in an even more aggressive hawkish pricing for 2022, which is something the Riksbank wants to avoid, even at the expense of further undermining the credibility of its forward-looking guidance, in our view.
Consequently, we believe that a change in the Riksbank’s pigeon position will not take place at the November meeting and may therefore have to wait for either the meeting in February 2022, or have to go through other communication challenges sometime between November and February.