Between today and next week we will hear from a number of central banks on their policy decisions. As we expected, this morning Sweden's Riksbank held rates at -0.5%. Although it highlighted its anaemic inflation concerns adding an upturn will need continued support by way of holding the current repo rate at -0.5%; six month longer than what was assumed in September. It also stated that ‘actions of other central banks’ will affect its ‘decision to extend purchases’ stating its willingness to extend its asset purchase programme in December. Away from inflation, there have been a few economic data prints which have surprised on the upside; unemployment fell in September and October’s consumer confidence read beat market expectations as a result of recent stronger economic growth. Although growth forecasts for 2016 and 2017 have been cut to 3.2% and 2.2% respectively.
Norges Bank also kept rates on hold, with its deposit rate staying at 0.5%; the highest rate amongst its regional peers. The country’s growth stalled in the second quarter this year, but unemployment remains at multi-year highs of 4.9%, and the country’s inflation rate sits at 3.9%, as at September. The central bank expects the key rate to remain at this level for the foreseeable future and as such the Norwegian krone has been one of the best performing major currencies this year.
Although geographically close, Norway and Sweden’s policy stances are worlds apart, especially in terms of fiscal policy; resulting from the structurally differing economies. Norway has been tapping into its huge USD880bn oil fund to fill a hole in the annual budget and thus support the country’s growth. Sweden’s central bank on the other hand has much less ammunition to push fiscal easing, thus relies much more on monetary policy, i.e. negative rates to spur growth. Currency also has a part to play, Both Sweden and Norway are very open economies (exports plus imports account for more than 90% of GDP) so the strength of their currency has a larger bearing on their economy, Norges Bank has clearly been focused on targeting its currency to spur inflation and growth both post financial crisis and during the recent oil glut, whereas the Riksbank has been slow to act.
Elsewhere, next week will see the BoJ, BoE and Fed ‘SuperThursday’ policy meetings. Today the UK GDP reading was released at 0.5%qoq and 2.3%yoy, beating expectations, although the only driver for Q3’16 growth was the service sector. With growth coming in-line with post-crisis levels the market consensus is that the BoE will leave monetary policy unchanged, at least until the first quarter of 2017. The post-referendum and more recent collapse in the sterling will no doubt be discussed. As Carney stated at the House of Lords on Tuesday, officials are not 'indifferent to the exchange rate'; the currency has fallen over 11% since the results were announced.
Across the pond, even the doves have begun to express their ‘belief’ that the Fed should continue normalising rates; albeit data dependant and gradual. Our best guess is that the Fed will sit on their hands next week and look to hike in December, a year after the first post-crisis hike. We suspect that the central bank will not hike ahead of the elections as although Hillary appears to be leading the polls, but is still too early to call, after all the world was surprised with the Brexit outcome. The futures market is pricing in a 72.5% chance of a December rate rise, up from 59% at the end of September, and only a 17% chance next week.