Moderate growth and low inflation in Sweden:
The Swedish economic upturn continues, driven by households' demand. The low inflation has driven the Riksbank's repo rate down to zero this autumn. Yesterday's message from the central bank was that the falling oil price will weigh on inflation. Therefore, the expected timing of the first hike was pushed further out in time, to the second half of 2016.
Our analysts at DNB Markets expect the Swedish economy to pick up speed in the next years. Household demand is set to remain strong, as mortgage rates are record-low and the labour market is improving. Export growth will also pick up as global demand improves. This will also be beneficial for business investments. In sum GDP growth is expected to pick up gradually from 1.9% in 2014, to 2.3% in 2015, and further towards 2.5% in 2017.
First hike in February 2017? Given the moderate forecast for growth and inflation, the analysts believe that the Riksbank will have to wait until February 2017 before the repo rate can be increased from zero. Forward guidance (i.e. interest rate paths) will be the central bank's main monetary tool going forward.
Norway: The NOK is clearly undervalued at current levels
However, with the current market conditions, we find it hard to rule out a further weakening of the NOK in the short term. With volatility on the rise, the uncertainty of the effects on the real economy of lower oil prices prevailing and given the obvious chance of another day like today, we find it hard to believe speculative accounts to start building long NOK positions at current. So while expecting to see a stronger NOK as the current risk premium on the NOK is gradually reversed, we have to see volatility lower before expecting that to happen.
