Higher inflation to prompt Nordic rate rises

The latest data suggest that underlying inflation is picking up in Sweden, Norway and Iceland and we expect the central banks in all three countries to respond by tightening monetary policy. In Sweden, non-energy CPIF inflation rebounded in September and capacity utilisation measures suggest that it will rise further. As headline CPIF inflation is already above the Riksbank’s 2% target, we expect the Bank to signal more clearly at its meeting tomorrow that it will start raising interest rates in December. In Norway, while CPI-ATE inflation, which excludes energy and taxes, held at 1.9% in September, that was above the Norges Bank’s forecast. The continued recovery in the labour market should push up wage growth further, boosting core inflation. So we expect the Norges Bank to follow September’s 25bp interest rate rise with two further hikes in 2019. Meanwhile, faced with above-target inflation and rising inflation expectations, we think that the Central Bank of Iceland will follow through on its signals to tighten policy, starting with a 25bp hike in December. By contrast, underlying inflation remains very weak in Switzerland and we therefore expect the Swiss National Bank to leave interest rates unchanged until 2020.