News & analysis


In September, we wrote a note about how inflation data in Sweden continues to nullify the Riksbank’s rate path projection, which forecast interest rates returning to 0% at the beginning of 2020.

However, it wasn’t just the fall in that month’s inflation data, with the headline falling from 1.7% to 1.4% and the core measure moderating to 1.3%, but a combination of them both along with the drop in inflation expectations.

The triple whammy made the prospect of policy normalisation almost comical, so you may be asking why we are even discussing the Riksbank’s upcoming policy announcement.

While inflation and output data in Sweden suggest the Riksbank shouldn’t hike rates in the near future, the hawkish rhetoric from Governor Ingves and co suggests that the bank is on a path to zero irrespective of economic conditions.

Markets have begun to factor this into their projections, with a 25% probability of a rate hike in December’s meeting currently baked into Overnight Index Swaps.

Looking out to further tenors, things don’t look much rosier for the Riskbank.

Market participants are still pricing rates in negative territory for the next 2-years, with the 2-year OIS swap currently trading at -0.1260 (roughly a 50% probability of a rate hike).

The market’s narrative for rate changes by the Riksbank is quite clear, rate hikes are not needed until a material uptick in inflation and growth is forthcoming – both domestically and globally.

That leaves Ingves in a bit of a sticky position…

While the low level of SEK has helped the data to stabilise and marginally increase the argument for a rate hike in the coming periods, any sudden adjustment by the Riskbank would likely derail any progress made thus far.

For that reason, we are convinced by the current market pricing and expect the Riksbank to further flatten their policy path on Thursday to reflect current conditions. This is reflected in our latest SEK forecasts – 9.8 for one-month, 9.7 end of year.

Copyright: Bloomberg Finance LP.


Norges Bank

The Norwegian krone recently fell to a record low against USD and EUR following heightened market uncertainty around Brexit and US-China trade tensions.

The Norwegian economy, however, has remained resilient to the global economic slowdown and the drop in oil prices. A sharp pick-up in oil investment to 19% is expected this year, which would mark its fastest growth since 2013.

Price pressures from a weak krone and the remarkable economic buoyancy has kept the Norges bank swimming against the global tide of monetary policy easing, ultimately delivering 100 bps of rate hikes over the last year.

This time around, the persistent currency losses also provide support to the case of further monetary tightening, although in the last monetary policy meeting the rate path was forecast to flatten over the medium-term horizon.

Economic activity is set to slow next year due to the lagged impact of lower oil prices, while global trade tensions should filter further through.

The labour market, on the other hand, will likely fail to add inflation pressures, with further room for employment to grow before wages start rising at a faster rate.

These risks are likely to become evident in the cautious stance of the Norges bank, and keep any potential rate hike on hold at least through the second half of 2020.

That being said, the Central Bank will remain observant of further NOK depreciation – the likely driver of a future spike in inflation.

NOK has depreciated over 3% against the USD and over 4% against the EUR since the last policy meeting and remains poised to broadly weaken on the back of peaking global uncertainty.

In addition, our bearish outlook on SEK should also limit any NOK gains. While policy is expected to remain on hold this Thursday, all eyes will be fixed on how the Norges bank weighs further currency depreciation and any future monetary adjustments.


Central Bank of the Republic of Turkey

The CBRT join other central banks like the Riksbank, ECB, and Norges bank in setting rates on Thursday. Although, unlike the rest, Turkey’s central bank still has scope to change rates given the stabilisation of inflation. The extent to which the repo rate is reduced is key for the lira.

The politicisation of monetary policy in Turkey has roiled financial markets in the past 12-months.

While recent monetary policy adjustments have been viewed as prudent by financial markets, political pressure could once again mount as the scope for large rate cuts by the CBRT diminishes.

We have long voiced our opinion that rates in Turkey should see out the year around 14%, suggesting scope for a further 250bps of rate cuts spread out over the remaining two meetings.

But with a 5% growth target for 2020 and a longstanding view of lower interest rates, the potential for an overshoot in rate cuts and the resulting market sell-off is high.

Further prudence in rate adjustments by the CBRT should be taken given the recent decision by the Turkish administration to enter Syria. Investor sentiment is tentative under the threat of economic sanctions, and a misstep by the CBRT could trigger another run at the 6.00 level in USDTRY.

Analysts have also taken this prudential view on Turkish rate cuts, with the median forecast supplied to Bloomberg implying only 100bps will be shaved off on Thursday.

Forecasts have recently underplayed the CBRT’s actions, and given our view that rates will end the year at 14%, we believe the CBRT will deliver 150bps of cuts – any more could prove to be a miscalculation.


Author: Simon Harvey, FX Market Analyst at Monex Europe. 



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