Riksbank had hiked its repo rate by 25 basis points in December. This was the first hike in seven years. It also postponed the next 25 basis points hike to “the second half” of 2019. Thereafter, it expects fewer than two 25 basis points hikes per year according to the repo rate forecast, noted Danske Bank in a research report. Nevertheless, the December hike is possibly a ‘one and done’. Some might consider the downward shift in the repo rate path as soft. Nevertheless, the money market expects an even slower tightening path.
“There are no significant differences between our growth outlook for 2019 and the Riksbank’s, with both of us expecting about 1.5 percent GDP growth. However, we remain more bearish on inflation”, said Danske Bank.
The central bank expects core inflation to be closer to 2 percent this year. If the CPIF and CPI falls as the central bank expects, it would be surprising inflation expectations do not fall as a result, becoming detached from the target. Expectations are solidly correlated with the most recent inflation print.
“This means the whole foundation for further rate hikes will probably erode in the coming year. We expect the Riksbank to make a decision about how to handle its QE bond portfolio, which will probably be in April”, added Danske Bank.