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Victor Mendez-Barreira
Euro
Europe
European Central Bank (ECB)
Exchange rate
Inflation
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Monetary Policy
Central banks in Norway, Sweden and Switzerland are expected to accelerate their monetary policy normalisation, observers say.
Inflation is above target in all three countries. The European Central Bank’s two recent rate increases mean the eurozone’s neighbours need to avoid a weaker exchange rate and higher inflationary pressures.
The first policy meeting will take place in Sweden on September 20. At its latest meeting in June, Sveriges Riksbank increased the policy rate by 50 basis points to 0.75%. Deputy governor Martin Flodén said on August 24 the Riksbank had tightened policy to “reduce the risk of high inflation in the longer term”. He added: “Developments over the summer underline the need to continue to act decisively so that inflation returns to the target of 2%.”
Last month’s inflation readings came out after Flodén’s speech and have probably reinforced hawks in the Riksbank’s executive board. The Riksbank’s consumer price index at a fixed interest rate measure (CPIF) increased year on year by 9% in August. This was well above the central bank’s forecast of 7.5%, and its target level of 2%.
As in the rest of Europe, energy prices are the main factor behind rising inflation. Nonetheless, the CPIF index excluding energy prices rose by 6.8%, while the forecast was just 5.7%. This is the highest core inflation reading since December 1991.
“The message from this week’s inflation release for August was clear. Price pressures in Sweden are intensifying and broadening,” says Jessica Hinds, senior Europe economist with Capital Economics.
This week the Prospera survey on inflation expectations showed that although expectations for one and two years ahead keep on rising, those for five years ahead stayed at 2.3%, points out Hinds.
All in all, the case for rapid policy normalisation is even stronger than in previous weeks, and most analysts expect the central bank to increase the policy rate by 75bp to 1.5%.
On September 22, the Swiss National Bank will hold its quarterly policy assessment. In June, the central bank surprised markets and analysts by increasing the policy rate by 50bp to -0.25%.
Next week, it is overwhelmingly expected to bring interest rates into positive territory for the first time since 2014. Most analysts forecast a 75bp increase, taking the policy rate to 0.5%, still below the ECB’s.
But the SNB’s future policy path remains less clear. “Investors expect the SNB to tighten substantially at its upcoming meetings, but we think that they have got ahead of themselves,” says Jack Allen-Reynolds, senior Europe economist with Capital Economics.
“After all, while headline inflation is historically high, it is low by international standards and the surveys suggest price pressures may now be easing.”
In contrast to the eurozone’s 9.1% inflation reading in August, headline inflation in Switzerland increased by 3.5%. Additionally, over the last three months the Swiss franc has appreciated by 10% against the euro, which reduces the relative price of imports.
Nonetheless, the ECB signalled in its latest meeting it plans to implement more rate rises over the coming months.
“Failing to keep pace with the ECB would widen the rate differential more than the SNB would like and it would risk a sharp depreciation of the franc,” said Allen-Reynolds. “Assuming that inflationary pressures start to ease, we expect future rate hikes to be smaller.”
In contrast to most central banks, in addition to the policy rate the SNB can manage its exchange rate by leveraging its $1 trillion reserves portfolio. “If the franc weakens too much, then the SNB may choose to sell some if its FX reserves to prop up the currency,” adds Allen-Reynolds.
Also, on September 22 Norges Bank will held its next policy meeting when it is expected to increase rates by 50bp.
In contrast to the Riksbank and the SNB, Norges Bank started to normalise policy in September 2021, increasing the policy rate from 0% to 0.25%. After a series of gradual hikes, the central bank’s board increased rates by 50p to 1.75% at its August meeting.
“That is unlikely to be the last hike, but the high level of household debt suggests that the central bank won’t have to go much further,” says Allen-Reynolds from Capital Economics. “Since that meeting, the economic data have been mixed. The bank’s latest regional network survey showed that firms expect output growth to slow sharply in the coming six months.”
Nonetheless, Norway’s economy keeps on expanding while capacity utilisation and labour shortages remain very high, he said.
Inflation remained very high in August. The consumer price index measure excluding energy products targeted by Norges Bank increased year on year by 4.7%. The index including energy prices rose by 6.5%.
Some analysts fear these protracted pressures could end up having second-round effects. “Firms expect high energy costs and faster wage growth to push up prices in future,” says Allen-Reynolds. “The strength of domestic inflation pressures is clear from the latest consumer price data.”
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