Nordic & Swiss Economics

Breman unlikely to rock the boat at the Riksbank

Nordic & Swiss Economics Weekly
Written by David Oxley

The forthcoming addition of Anna Bremen to the Riksbank’s Executive Board is unlikely to significantly affect the balance among the Bank’s policymakers. While we think that they will follow through on their forecast to hike the repo rate by 25bp, to zero, in December, we suspect that they will have little choice but to reluctantly loosen policy again next year.

Musical chairs at the Riksbank

The announcement this morning by the Riksbank that Anna Breman will fill the vacant seat on the Executive Board ends the period of uncertainty since the news of Kerstin af Jochnick’s departure was made public in July. It was also announced today that Cecelia Skingsley will succeed Ms af Jochnick as First Deputy Governor at the Bank.

Ms Breman is currently Chief Economist at Swedbank and will take part in the next policy meeting, on 18 December. While her policy-setting views are not completely clear, given that Swedbank’s latest forecasts for the economy and the repo rate are broadly in line with the Riksbank’s, we doubt that she will rock the boat too much; we suspect that she will add to the ‘centrist’ contingent on the Board. More generally, the fact that Swedbank’s latest economic quarterly has a subsection titled ‘The imminent need for fiscal policy’, suggests that she will be an advocate for the government to step up to the plate; she will find an ally on the Board in Per Jansson who recently argued that there is “too much focus” on budget surpluses given Sweden’s strong fiscal position.

The minutes from the Bank’s last policy meeting (released on Tuesday) were a bit more dovish than expected, although we still think that the Bank will follow through on its plan to hike the repo rate by 25bp, to zero, in December. Nonetheless, given that any hopes for fiscal support are likely to be dashed, and that inflation is likely to fall back in 2020 as the economy remains very weak, we suspect that the Riksbank will have little choice but to reluctantly loosen policy again next year.

Denmark to tweak its tiering system?

Denmark’s Nationalbank confirmed this week that it intervened to prop up the krone in October for the first time since January, albeit on a very small scale. Recall that the Bank lowered its deposit rate to
-0.75% in September within hours of the ECB’s 10bp rate cut. Since then, the krone has fallen to multi-years lows against the euro. (See Chart 1.)

Chart 1: Danish Krone & Nationalbank Interventions

Sources: Refinitiv, Capital Economics

The fall in the krone has been attributed to a number of factors including a rise in DKK liquidity linked to the timing of tax payments and the fact that the Bank did not follow the ECB’s lead in making its tiering system for banks more generous in September. Our base case is that the Nationalbank will mirror the 30bps of rate cuts that we have pencilled in for the ECB next year. But the confirmation that the Bank will not allow the krone to fall far below 7.47 to the euro suggests that it will tread carefully and may have to tweak its tiering system in due course.

Central Bank of Iceland now in wait and see mode

As expected, the Central Bank of Iceland cut its deposit rate by 25bp, to a new record-low of 3.00%, at its meeting on Wednesday. Having reduced rates by 150bps since early-2019, the Bank gave a strong hint that the cut would be the last in the cycle.

All told, while we think that the balance of risks is still skewed towards further easing, we have removed the 25bp cut that we previously had pencilled in for the December meeting and expect rates to remain on hold over the coming years.

The week ahead

Norwegian CPI data, scheduled for release bright and early on Monday morning, are likely to show that core price pressures rose in October. Meanwhile, we expect GDP data from Norway for Q3, released the next day, to show that the economy remains a bright spot. Elsewhere, headline inflation in Sweden is likely to have risen in October.


Data Previews

Norway Consumer Prices (Oct.) Mon. 11th Nov.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

CPI m/m(y/y)

07.00

+0.5%(+1.5%)

(+1.8%)

0.0%(+1.6%)

CPI-ATE m/m(y/y)

07.00

+0.6%(+2.2%)

+0.1%(+2.5%)

Edging up

Having edged down in September, Norwegian inflation probably rose a touch in October.

Headline inflation has been on a downward trend since the start of the year, and reached a 22-month low in September (1.5%). That said, the Norges Bank’s preferred measure of inflation, CPI-ATE, which excludes energy and taxes, edged up from 2.1% in August, to 2.2%.

In October, headline inflation is likely to have risen a touch. We suspect that CPI-ATE inflation increased as a fall in underlying inflation was offset by a pick-up in food inflation. Meanwhile, although developments in electricity prices suggest that energy inflation is likely to have edged up, it will have remained in negative territory.

Looking ahead, the recent fall in the krone will add to imported price inflation in the coming months. Moreover, given the comparative strength of the economy, CPI-ATE will remain close to target over the coming years. (See Chart 2.)

Chart 2: Norwegian Consumer Prices (% y/y)

Sources: Refinitiv, Capital Economics

Norwegian GDP (Q3) Tue. 12th Nov.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

Mainland GDP q/q (y/y)

07.00

+0.7%(+2.5%)

+0.8%

+0.7%(+2.8%)

Total GDP q/q (y/y)

07.00

+0.3%(+1.2%)

+0.5%(+1.1%)

Another strong quarter

Q3 GDP data are likely to show that the Norwegian economy remains a bright spot among the Nordics.

Mainland GDP growth (which excludes oil and gas) accelerated in Q3, from 0.5% q/q in Q2 to 0.7%, largely due to a pick-up in investment.

The monthly national accounts data show that growth slowed in 3m/3m terms in August. But even if mainland output was unchanged in m/m terms in September, the economy would have expanded by about 0.7% q/q in Q3. (See Chart 3.) This echoes the positive message from business surveys such as the Regional Network Output Expectations survey.

Oil-related activity has continued to contract, albeit by less than throughout Q1 and Q2, and as a result we expect total GDP growth to have also edged up, to 0.5% q/q in Q3.

Chart 3: Mainland GDP Growth

Sources: Refinitiv, Capital Economics

Sweden CPI (Oct.) Wed. 13th Nov.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

CPIF m/m(y/y)

08.30

+0.5%(+1.3%)

+0.1%(+1.5%)

0.0%(+1.5%)

CPIF ex. energy m/m(y/y)

08.30

+0.5%(+1.6%)

0.0%(+1.7%)

Staying well below target

Headline CPIF inflation in Sweden is likely to have risen a touch in October but will have remained well below the Riksbank’s target.

The Riksbank’s target variable – CPIF inflation, which excludes the direct effects of interest rate changes – was unchanged, at 1.3% in September, well below the Bank’s 2% target and its joint lowest rate since September 2016. CPIF excluding energy also held steady, at 1.6%, from August.

Electricity prices rose in monthly terms in October but are still consistent with energy inflation having remained negative. Nonetheless, we suspect that CPIF excluding energy edged up a bit. We have pencilled in a small increase in CPIF as well, from 1.3% in September to 1.5%.

With resource utilisation plummeting, and surveys indicating that the economy is very weak, underlying price pressures are likely to remain subdued throughout 2020. (See Chart 4.)

Chart 4: CPIF excl. energy & Resource Utilisation

Sources: Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time CET

Time (GMT)

Previous*

Median*

CE Forecasts*

Mon 11th

Den

CPI (Oct, EU Harm.)

08.00

(07.00)

-0.3%(+0.4%)

Nor

CPI (Oct)

08.00

(07.00)

+0.5%(+1.5%)

(+1.8%)

0.0%(+1.6%)

Nor

CPI-ATE (Oct)

08.00

(07.00)

+0.6%(+2.2%)

+0.1%(+2.5%)

Tue 12th

Nor

Mainland GDP (Q3, q/q(y/y))

08.00

(07.00)

+0.7%(+2.5%)

+0.8%

Wed 13th

Swe

CPI (Oct)

09.30

(08.30)

+0.5%(+1.5%)

0.0%(+1.6%)

+0.1%(+1.7%)

Swe

CPIF (Oct)

09.30

(08.30)

+0.5%(+1.3%)

+0.1%(+1.5%)

0.0%(+1.5%)

Swe

CPIF Ex. Energy (Oct)

09.30

(08.30)

+0.5%(+1.6%)

0.0%(+1.7%)

Thu 14th

Fin

CPI (Oct)

07.00

(06.00)

0.0%(+0.9%)

Fin

Trend GDP Indicator (Sep)

07.00

(06.00)

(+2.5%)

Den

GDP Indicator (Q3, q/q)

08.00

(07.00)

0.9%

0.1%

Swe

Unemployment Rate (Oct)

09.30

(08.30)

7.4%

Fri 15th

Nor

Trade Balance (Oct, NOK)

08.00

(07.00)

-1.2bn

Selected future data releases and events

Wed 20th

Swe

Riksbank publishes Financial Stability Report

09.30

(08.30)

Swe

Capacity Utilisation (Q3)

09.30

(08.30)

90.8

Thu 21st

Nor

Oil Investment Forecast (Curr. Yr, Q4, NOK)

08.00

(07.00)

181bn

Swi

Industrial Production (Q3, q/q(y/y))

08.30

(07.30)

+3.1%(+4.8%)

Main Economic Forecasts

Share of

World

GDP

Consumer Prices (HICP)

2018

2019

2020

2021

2018

2019

2020

2021

Switzerland

0.42

2.5

0.5

0.5

1.5

0.9

0.5

-0.3

0.5

Sweden

0.41

2.5

1.0

0.5

1.5

2.0

1.7

1.6

1.8

Norway

0.31

2.6

2.5

1.7

2.0

3.0

2.2

1.6

2.5

Denmark

0.23

1.5

2.0

1.0

1.5

0.7

0.8

0.9

1.3

Finland

0.20

1.7

1.0

0.8

1.0

1.2

1.0

1.0

1.2

Iceland

0.01

4.6

0.0

1.5

2.5

2.3

3.2

2.5

2.7

Sources: Refinitiv, Capital Economics

Key Market Forecasts

Forecasts

Forecasts

Latest

End 2019

End 2020

End 2021

Latest

End 2019

End 2020

End 2021

Swiss policy rate

-0.75

-0.75

-1.00

-1.00

Swiss fr/euro

1.10

1.10

1.10

1.10

Swe. repo rate

-0.25

0.00

-0.25

-0.25

Swed. Kr/euro

10.70

11.00

11.00

10.50

Nor. depo rate

1.50

1.50

1.50

1.50

Nor. Kr/euro

10.09

10.30

9.80

9.30

Den. depo rate

-0.75

-0.75

-1.05

-1.05

Dan. Kr/euro

7.47

7.47

7.46

7.46

ECB depo rate

-0.50

-0.50

-0.80

-0.80

US$/euro

1.10

1.10

1.05

1.05

Ice. depo rate

3.00

3.00

3.00

3.00

Ice. Kr/euro

138

143

140

135

Sources: Refinitiv, Capital Economics


David Oxley, Senior Europe Economist, +44 20 7811 3906, david.oxley@capitaleconomics.com