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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 00 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 0#1- 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 0une 121&
2& he 2inancial Sta"ility Council !a$es clear( forceful
reco!!endations for countering increased inde"t)
edness .May 2/1&
/& 3ea$ 456 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 $rona .0une %1&
%& he e*change rate strengthens !ore than the Ri$s)
"an$ forecasts&

he fifth e#ent( the e*change rate trend during the period
until the Ri$s"an$ !eeting in 0uly( 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&
4raph 1 shows the trend of the Swedish $rona in trade)
weighted ter!s .the so)called :I; Inde* or 8ffecti#e 8*)
change Rate Inde*1 and the Ri$s"an$<s forecast&

5ate 5ate 5ate 5ate 8#ent 8#ent 8#ent 8#ent
May 1/ May 1/ May 1/ May 1/ Inflation figure for ,pril
May 2/ May 2/ May 2/ May 2/ Meeting of the 2inancial Sta"ility Council
May /0 May /0 May /0 May /0 456( first =uarter
0une % 0une % 0une % 0une % 8C9 interest rate announce!ent
0une 12 0une 12 0une 12 0une 12 Inflation figure for May
0uly / 0uly / 0uly / 0uly / 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 456 growth and
!easures "y the 8C9 could again contri"ute to an apprecia)
tion of the Swedish $rona and lower inflationary pressure&

4raph 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 C6I2 was 0&0
percent( the lowest figure recorded since the co!!ence!ent
of the series in 1?BB&

4raph 2& Re!ar$a"le de#iation fro! the inflation target



2alling inflation is not only a Swedish pheno!eno!& 4raph 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(
SwitCerland( the 8uroCone and Canada& ,lso( 4raph 1 shows a
further drop of inflation in March co!pared with the a#erage
for the past 12 !onths in Sweden( the 8uroCone and Dor)
way& In the ES,( Canada and SwitCerland 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& 2irst( 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$<s forecast is that t Swed"an$<s forecast is that t Swed"an$<s forecast is that t Swed"an$<s forecast is that th hh he ee e 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 0uly rate "y 2% "asis points in 0uly rate "y 2% "asis points in 0uly rate "y 2% "asis points in 0uly& 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&

2irstly( 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 4raph /1& Inflation e*pectations fell "elow 2 percent
at the "eginning of 201/( and since 0uly 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$s"an$&

4raph /+ 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 2inan)
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&
1
1,2
1,4
1,6
1,8
2
2,2
2,4
jan-12 apr-12 jul-12 okt-12 jan-13 apr-13 jul-13 okt-13 jan-14 apr-14
P
r
o
c
e
n
t
Prospera: Inflationsfrvntningar bland
penningmarkandens aktrer
2 rs sikt 5 rs sikt
Klla: TNS SIFOProspera och Riksbanken


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&

4raph 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
4raph 41&

2inally( 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 0uly(
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

















































































0,00
0,50
1,00
1,50
2,00
2,50
3,00
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
Outcome
Riksbanken (Feb)
Riksbanken (Ap)
!"e#bank (Ap)
Riba (9 ma$)


Macro focus Sweden
4 of 5 Strategy and Macro Research Large Corporates & Institutions
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