Riksbank outlook: no rate hike on the radar screen

At December’s monetary policy meeting, the Riksbank decided to leave the repo rate unchanged at 0.25%. The Central Bank also confirmed its previous path estimate of the rate for the coming years, as it is expected to remain steady at the current level until autumn 2010, then rise to 0.5% by the end of 2010, to 2.5% by the end of 2011, and to 4.25% by the end of 2012. The Riksbank is widely expected to leave the rate unchanged at 0.25% and to confirm the previously estimated rate path in the Monetary Policy Report released at the end of the meeting. The report will also contain the new projections on the progress of inflation and economic growth. Deputy Governors Nyberg and Wickman-Parak may enter yet a third consecutive reservation against the repo rate path. During December’s monetary policy meeting, they considered that it would be necessary to raise interest rates sooner than indicated by the proposed interest rate path, but that the path would consequently not need to be so steep during the remaining forecast period. We do not expect Deputy Governor Svensson to vote for another rate cut. Despite the better-than-expected economic data published over the past few weeks, we believe that the Riksbank will not tighten rates until the ongoing economic recovery proves itself well established. Moreover, the Riksbank is seeking a Krona appreciation in the coming years. Thus, it is highly unlikely that rates will be raised before other Central Banks (i.e. the ECB). Subsequently, we do not pencil in a rate hike by the Riksbank before H2 ’10. Nonetheless, we believe that the Riksbank will raise rates higher than actually forecasted.