Riksbanken hiked as expected

(16.02.2011) As expected Riksbanken hiked the repo rate to 1.5% yesterday. In addition the rate path was adjusted upwards and the SEK strengthened. Today focus will turn to the inflation report from Bank of England, that may show the need for higher rates in the UK.

By Knut A. Magnussen, Senior Economist at DNB Markets

illustration dnb mor markets dealingroom in osloAs expected Riksbanken yesterday hiked the repo rate from 1.25% to 1.5%. The rate path was also somewhat higher than in December, indicating 4 25 bps. hikes at the 5 remaining meetings this year. As usual both Svensson and Ekholdm dissented from the rate decision and were in favour of a lower rate path. The GDP forecasts were only marginally adjusted (4.4% this year) while the inflation forecasts were somewhat higher than before (1.9% for 2011).

The SEK strengthened vs the EUR after the decision
, indicating that the FX market had not fully anticipated the rather hawkish stance of the central bank. However, the hike and the higher rate path were priced in by the fixed income marked in advance of the decision.

UK inflation rose as expected from 3.7% in December to 4.0% in January. Once again food and energy prices contributed most to the increase in inflation, while core inflation only rose from 2.9% to 3.0%. The central bank is probably not surprised by the rise, but the Governor nevertheless had to write another letter to the Chancellor. He said: “Although one cannot be sure, prices excluding the effects of these factors would probably have increased at a rate well below the 2% inflation target.” Hence there is not obviously a need for higher rates in order to curb the high inflation. He also wrote: “And I do not wish to conceal that there are real differences of view within the Committee”. In the inflation report out today Bank of England will make new inflation forecasts and may indicate the need for higher interest rates in order to curb inflation in the medium term. However, we think there is actually no need for higher rates at the moment.

US retail sales disappointed in January. The growth rate (0.3%) was only half of the expected size. Corrected for car sales and building material, sales even declined by 0.7%. Hence the start for Q1 was rather weak compared with the very strong Q4. However, bad weather may have hampered sales somewhat. Today more US data will be released. Of most importance are housing starts and industrial production. In addition the FOMC minutes from the January meeting will be released. Even if the statement was not much changed from December, the discussions may have been affected by the four new alternate members.   

Eurozone GDP rose by 0.3% in Q4. This was less than expected and both Germany and in particular France disappointed. Cold weather may have reduced activity somewhat. The strong ZEW index for February suggests that activity has held up well into Q1. However, the ZEW index is based on a survey of financial analysts and is not obviously a good indicator for economic activity.

After the high Chinese inflation in January, it seems that the authorities are letting the yuan continue to appreciate. Yesterday it reached 6.5845 vs the dollar, close to the all time high from late January. The market expect a further appreciation of 5-6% this year.

Our macro score, which was updated yesterday, still show that the macro news has been positive recently: 10 out of 15 adjustments were positive this month. The Norwegian and the Swedish economies are the strongest, followed by UK. The US economy has also improved the past month and Japan is now by far the weakest economy of the ones we follow regularly.