SEB strategist forecasts Swedish rate hike

Rising inflation in Sweden during 2017 will see the Riksbank, the country’s central bank, raise interest rates by the end of the year, according to corporate bank’s fixed income macro strategist, Olle Holmgren.

“Growth indicators in Sweden have remained strong and we see upside risks to our 2017 gross domestic product (GDP) forecast of 2.8%,” said Holmgren.

“A weaker krona [SEK] and energy will lift inflation this year, and although, we expect CPIF – the consumer price index [CPI] with a fixed interest rate – to remain below the Riksbank’s target both in 2017 and 2018, inflation will be high enough to motivate a monetary policy shift.

“We think the Riksbank will decrease its easing bias during the spring and a first rate hike is likely already in December this year. The belly of the Swedish Government Bond [SGB] curve is expensive and we expect it to start underperforming as markets refocus on upcoming monetary policy shift towards mid-2017.”

SEB sees the Riksbank undergoing a gradual shift to a tightening basis, influenced by the following factors:

• Inflation is high enough to motivate a monetary policy shift.
• Riksbank is likely to decrease the easing bias as soon as February or April, and remove it at its July meeting at the latest.
• A stronger SEK could delay timing of first hike, which is expected in December.
• SEK and energy will lift inflation this year, but CPIF will still be below the Riksbank’s target in 2018.
• Domestic demand is the main driver for growth in Sweden and resource utilisation is approaching a historical high.
• Sweden’s employment growth will accelerate and unemployment decline in 2017.

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