Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Save to My Library
Look up keyword
Like this
0Activity
0 of .
Results for:
No results containing your search query
P. 1
What is needed for a 50 basis point cut in July?

What is needed for a 50 basis point cut in July?

Ratings: (0)|Views: 17 |Likes:
Published by Swedbank AB (publ)
What is needed for a 50 basis point cut in July?
What is needed for a 50 basis point cut in July?

More info:

Categories:Presentations
Published by: Swedbank AB (publ) on May 15, 2014
Copyright:Traditional Copyright: All rights reserved

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

05/15/2014

pdf

text

original

 
 
Strategy and Macro Research – Large Corporates & Institutions
1 of 5
Title
Macro analysis – 12 May 2014
 
Macro focus – Sweden
What is needed for a 50 basis point cut in July?
 
Several events during May and June can in-crease the likelihood of a 50 basis point cut in  July
 
At present the likelihood of a 50 basis point cut in July is about 10 percent
 
There is a strong economic case for a 50 basis point cut in July !nflation in S"eden sho"s a remarkable deviation from the inflation target !n March the #$! "as -0% percent and the #$!& 'consumer price inde( "ith a fi(ed mort-gage rate) year on year change "as 00 percent The average for the past 1* months also sho"s that the #$! is a long "ay from the +iksbank,s target of * percent The market and S"edbank anticipates a repo rate cut of *5 basis points in July .ere "e present a list of the most important leads prior to the +iksbank,s monetary decision in July /e suggest that the likelihood of a 50 basis point cut in present circumstances is 10 percent but that the probability may rise if a number of events occur The three main variables "ill be '1) the inflation outcome '*) action by the # and '2) the meeting of the &inancial Stability #ouncil in May /hat is re3uired for the +iksbank to make a 50 basis point cut4
here are a nu!"er of e#ents which together would increase the li$elihood of a %0 "asis point interest rate cut In our  'udg!ent( at least three of these e#ents should de#iate su")stantially fro! !ar$et e*pectations for a %0 "asis point cut to "eco!e li$ely In chronological order the !ost i!portant e#ents are as follows+ 1
 
If actual inflation in ,pril and-or May is a surprise on the downside .May 1/ and une 12 2
 
he inancial Sta"ility Council !a$es clear( forceful reco!!endations for countering increased inde"t)edness .May 2/ /
 
3ea$ 56 in 2014 71( and-or a downward re#ision of 201/ 74 4
 
, !ore e*pansi#e !onetary policy fro! the 8C9 which wea$ens the euro and indirectly strengthens the Swedish $rona .une % %
 
he e*change rate strengthens !ore than the Ri$s)"an$ forecasts he fifth e#ent( the e*change rate trend during the period until the Ri$s"an$ !eeting in uly( does not ha#e a specific date "ut is an i!portant #aria"le ,ll e#ents in the list a"o#e can affect the e*change rate( "ut the e*change rate can also change as a result of other e#ents around the world( which affect the Swedish $rona e*change rate directly or indirectly raph 1 shows the trend of the Swedish $rona in trade)weighted ter!s .the so)called :I; Inde* or 8ffecti#e 8*)change Rate Inde* and the Ri$s"an$<s forecast 5ate5ate5ate5ate 8#ent8#ent8#ent8#ent May 1/May 1/May 1/May 1/ Inflation figure for ,pril May 2/May 2/May 2/May 2/ Meeting of the inancial Sta"ility Council May /0May /0May /0May /0 56( first =uarter  une % une % une % une % 8C9 interest rate announce!ent  une 12 une 12 une 12 une 12 Inflation figure for May  uly / uly / uly / uly / he Ri$s"an$<s interest rate decision he trend of the :I; since the last Ri$s"an$ !eeting in ,pril suggests that a cut is not li$ely >n May ? the Swedish $rona was 14 percent wea$er than in the Ri$s"an$<s forecast( in :I;)weighted ter!s In the opinion of 8C9( a 10 percent strengthening of the euro would contri"ute to a 40)%0 "asis point reduction in inflation Recalculated for Sweden( the latest wea$ening of the e*change rate could increase infla)tion "y 'ust a"out 10 "asis points( ie a 01 percent increase according to this rule of thu!" his howe#er is too little to get close to the inflation target in a !eaningful way @igher than e*pected actual inflation( strong 56 growth and !easures "y the 8C9 could again contri"ute to an apprecia)tion of the Swedish $rona and lower inflationary pressure
raph 1+ he Swedish $rona has wea$ened co!pared with the Ri$s)"an$<s forecast
 
 
Macro focus – Sweden
2 of 5
Strategy and Macro Research – Large Corporates & Institutions
+emarkable deviation from the inflation target
5espite an upturn in econo!ic acti#ity in 8urope and Swe)den( inflation continues to drop and une!ploy!ent re!ains at a persistently high le#el In Sweden the year)on)year C6I was )0A percent in March he year)on)year C6I was 00 percent( the lowest figure recorded since the co!!ence!ent of the series in 1?BB
raph 2 Re!ar$a"le de#iation fro! the inflation target
alling inflation is not only a Swedish pheno!eno! raph 2 shows that inflation is "elow the inflation targets in a nu!)"er of de#eloped econo!ies @owe#er( we can conclude that Sweden is further fro! its inflation target than( for e*a!ple( Switerland( the 8uroone and Canada ,lso( raph 1 shows a further drop of inflation in March co!pared with the a#erage for the past 12 !onths in Sweden( the 8uroone and Dor)way In the ES,( Canada and Switerland the latest outco!e is !arginally higher than the a#erage for the past 12 !onths he trend of falling interest rates in the !a'ority of de#el)oped econo!ies can "e di#ided up into three factors irst( a glo"al decline in food and energy prices Second( low capacity utilisation and a large surplus of unutilised resources in the la"our !ar$et since the financial crisis are holding down wage increases hird( structural changes are ongoing( lead)ing to greater co!petition in !any sectors and !a$ing it difficult for co!panies to raise prices his includes greater co!petition fro! e)co!!erce in the retail trade( lower !ar)ginal costs( for e*a!ple( in !usic( literature and 'ournalis!( and a larger international co!ponent in ser#ice sectors( pre)#iously reser#ed for local !ar$ets It is i!portant to e!phasise how difficult it is for the Ri$s)"an$ to achie#e the inflation target( "ut it is econo!ically #ery i!portant that it actually happens It is i!portant for the Ri$s"an$<s credi"ility 3ell anchored inflation e*pecta)tions are central for the Swedish wage "argaining process ,ccelerating ur"anisation in co!"ination with a low le#el of housing construction has led to a rise in household de"t( pri)!arily in the !etropolitan areas Statistics fro! the Ri$s"an$ show that the le#erage of households with new loans is a"out /F0 percent of disposa"le inco!e Low inflation will !ean an additional "urden for these households "ecause the #alue of the de"t will not decrease and !ight e#en increase if we ha#e deflation ,n inflation rate well "elow the inflation target will "enefit those who do not ha#e de"t and ha#e su")stantial assets( pri!arily older( affluent households @ouse)holds with high de"t le#els will lose out when their de"t does not decline in #alue Inflation which de#iates fro! the inflation target o#er a long period has a negati#e effect on the real econo!y It !a$es wage for!ation !ore difficult( the propensity of households to consu!e is wea$ened and incenti#es for co!panies to in#est are reduced here is a ris$ that the i!pro#e!ent in the econo!y will falter if the ad#erse effects of low inflation intensify
The case for a 50 basis point reduction in July
Swed"an$<s forecast is that tSwed"an$<s forecast is that tSwed"an$<s forecast is that tSwed"an$<s forecast is that thhhheeee Ri$s"an$ will cut the repo Ri$s"an$ will cut the repo Ri$s"an$ will cut the repo Ri$s"an$ will cut the repo rate "y 2% "asis points in ulyrate "y 2% "asis points in ulyrate "y 2% "asis points in ulyrate "y 2% "asis points in uly In our 'udg!ent( the li$elihood of a %0 "asis point cut is a"out 10 percent It !ay "eco!e !ore li$ely if one or !ore of the e#ents we list a"o#e actually occurs @owe#er( there is a strong econo!ic case for a %0 "asis point cut( e#en on the "asis of present infor!ation irstly( the re!ar$a"le de#iation fro! the Ri$s"an$<s inflation target puts the credi"ility of the Ri$s"an$ at ris$ and e*pec)tations of inflation will di!inish In the latest sur#ey for 6rospera( inflation e*pectations o#er fi#e years are 1B per)cent .see raph / Inflation e*pectations fell "elow 2 percent at the "eginning of 201/( and since uly 201/ the nu!"er has re!ained consistently "elow two percent wo year in)flation e*pectations are 1A percent he Ri$s"an$<s credi"il)ity is increasingly =uestioned in the econo!ic)political de"ate in Sweden here ha#e e#en "een calls for a less independent Ri$s"an$
raph /+ Inflation e*pectations drop
Secondly( it is reasona"le to as$ how !uch a 2% "asis point cut will affect inflation and the real econo!y , 2% "asis point cut is already priced into the !ar$et and its effects on the Swedish $rona should "e li!ited he effect on i!port prices would therefore "e li!ited and thus not contri"ute to higher i!ported inflation Interest costs for households and co!panies are already low and a 2% "asis point cut will only produce a !arginal increase in consu!ption and in#est!ent( and thus a wea$ effect on e!ploy!ent ,lso( a 2% "asis point cut would pro"a"ly "e countered "y a so!ewhat wider spread on !ortgage loans as a result of the Swedish inan)cial Super#isory ,uthority<s decision of May B on higher capi)tal re=uire!ents for the "an$s , %0 "asis point cut could actually ha#e so!e effect on infla)tion 9ecause the cut would "e une*pected( the Swedish $ro)na would wea$en and contri"ute to higher i!ported inflation and contri"ute to sti!ulating Swedish e*ports , %0 "asis point cut in interest rates could also contri"ute to e*pecta)tions for a stronger econo!y If households and co!panies e*pect higher growth in the future( this can lead to higher consu!ption and higher in#est!ent in the short ter! as well
11,21,41,61,822,22,4
 jan-12apr-12jul-12okt-12jan-13apr-13jul-13okt-13jan-14apr-14
       P     r     o     c     e     n      t
Prospera: Inflationsförväntningar bland penningmarkandens aktörer
2 års sikt5 års sikt
Källa: TNS
SIFO
Prospera ochRiksbanken
 
 
Macro focus – Sweden
3 of 5
Strategy and Macro Research – Large Corporates & Institutions Inflation would then "e sti!ulated "oth "y an e*change rate effect and greater do!estic de!and
raph 4+ he !ar$et<s price setting and the Ri$s"an$<s repo rate trac$
, %0 "asis point cut would strengthen the Ri$s"an$<s credi)"ility "y de!onstrating dedication to the inflation target his is i!portant for the econo!ic)political de"ate in Swe)den It can also contri"ute to i!pro#ing the !ar$et<s confi)dence in the Ri$s"an$ and reduce the difference "etween the !ar$et<s e*pectations a"out the repo rate trac$ and the Ri$s)"an$<s forecast , %0 "asis point cut could realistically con)tri"ute to higher inflation and interest rate increases in the future !ore in accord with the Ri$s"an$<s repo rate trac$ .see raph 4 inally( it could "e !ore effecti#e to !a$e a %0 "asis point cut at one go rather than lowering the rate in two 2% "asis point steps If the Ri$s"an$ !a$es a 2% "asis point cut and inflation re!ains wea$( e*pectations of a further cut will increase wo cuts( each of 2% "asis points( ris$ ha#ing less i!pact than one cut of %0 "asis points( not 'ust "ecause the second cut would lag "y se#eral !onths and therefore delay sti!ula)tion of the econo!y( "ut also "ecause e*pectations will again ha#e ti!e to for!( and the effect will then "e less 8#en if there is a case for %0 "asis point cut in uly( Swed"an$<s forecast is a cut of 2% "asis points It is !ainly the ris$s associated with the high le#el of household de"t that will $eep the Ri$s"an$ fro! cutting the repo rate "y %0 "asis points ,nalyst+ ,nna 9re!an( anna"re!anGswed"an$se( 0F0 /14 ?% BF
0,000,501,001,502,002,503,00
        2        0        1        0    -        1        1    -        0        1        2        0        1        1    -        0        1    -        0        1        2        0        1        1    -        0        3    -        0        1        2        0        1        1    -        0       5    -        0        1        2        0        1        1    -        0       7    -        0        1        2        0        1        1    -        0        9    -        0        1        2        0        1        1    -        1        1    -        0        1        2        0        1        2    -        0        1    -        0        1        2        0        1        2    -        0        3    -        0        1        2        0        1        2    -        0       5    -        0        1        2        0        1        2    -        0       7    -        0        1        2        0        1        2    -        0        9    -        0        1        2        0        1        2    -        1        1    -        0        1        2        0        1        3    -        0        1    -        0        1        2        0        1        3    -        0        3    -        0        1        2        0        1        3    -        0       5    -        0        1        2        0        1        3    -        0       7    -        0        1        2        0        1        3    -        0        9    -        0        1        2        0        1        3    -        1        1    -        0        1        2        0        1        4    -        0        1    -        0        1        2        0        1        4    -        0        3    -        0        1        2        0        1        4    -        0       5    -        0        1        2        0        1        4    -        0       7    -        0        1        2        0        1        4    -        0        9    -        0        1        2        0        1        4    -        1        1    -        0        1        2        0        1       5    -        0        1    -        0        1        2        0        1       5    -        0        3    -        0        1        2        0        1       5    -        0       5    -        0        1        2        0        1       5    -        0       7    -        0        1        2        0        1       5    -        0        9    -        0        1        2        0        1       5    -        1        1    -        0        1        2        0        1        6    -        0        1    -        0        1        2        0        1        6    -        0        3    -        0        1        2        0        1        6    -        0       5    -        0        1        2        0        1        6    -        0       7    -        0        1        2        0        1        6    -        0        9    -        0        1        2        0        1        6    -        1        1    -        0        1
OutcomeRiksbanken (Feb)Riksbanken (Ap)!"e#bank (Ap)Riba (9 ma$)

You're Reading a Free Preview

Download
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->