Sweden’s Biggest FX Trader Warns Rate Hike Could Come Quicker

  • SEB says historical bond data suggests rise in December
  • Riksbank still flags cut should inflation fail to lift

Sweden’s biggest currency trader is telling the market it should pay less attention to what the central bank says and more to what the bond market does for clues on the timing of the next interest rate increase.

And the somewhat surprising conclusion from SEB AB is that the Riksbank may hike the benchmark repo rate already in December.

Never mind that the central bank only last month flagged a potential rate cut this year, should inflation fail to live up to expectations; or that all other major Swedish banks don’t expect a hike before 2018.

“Long rates are right now rising more than short rates, and this pattern normally starts nine to twelve months before the first hike,” said Lina Fransson, a fixed income strategist at SEB in Stockholm. “By the summer, when the Riksbank likely abolishes the easing bias from its rate forecast, short rates will start to catch up. Historical correlations suggest that the Riksbank will start raising rates roughly six months after that starts to happen.”

A careful analysis of the way in which the Riksbank communicates with the market provides further evidence of an early hike.

“Historically, the Riksbank has tended to increase rates sooner than they’ve forecast,” Fransson said. “The same thing will happen this time around.”

According to SEB, Sweden’s economy will this year grow more strongly than the Riksbank’s own forecast of 2.4 percent, while Fransson says "the period of very weak inflation is behind us." Underlying inflation, which is adjusted for mortgage costs, rose to 1.9 percent in December -- just shy of that 2 percent target that has eluded the central bank for more than half a decade. The headline rate, for its part, rose to 1.7 percent, its highest level in almost five years.

Judging on past behavior, the Riksbank won’t necessarily wait for the 2 percent target to be met.

“We’re starting to approach the inflation levels that the Riksbank has been waiting for for a long time,” Fransson said. “Inflation rates of 1.6 percent or 1.7 percent have historically not been an obstacle for the Riksbank to start increasing rates.”

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