Forecast Upgrade Not Enough to Shift Rate Path

• Inline with the most recent set of rate path projections, the Riksbank are firmly expected to keep policy unchanged this week, with some focus likely to be paid to new repo rate path projections. The bank's projections extend into Q3 2024 at this release, and there are nascent expectations that the bank could begin to signal rate liftoff at the very long-end of their forecast horizon.
• Such a move would be supported by the growth and inflation turnouts since the previous monetary policy report, with both GDP data and CPIF releases coming in ahead of the Riksbank's April expectations. Nonetheless, underlying inflation is already beginning to show signs of a near-term peak, which supports the Bank's view that inflation pressures are still low. As such, these price rises do not need to be pinched off by tightening policy too early. The Bank looked to reinforce this message to markets at the last report, stressing that the pandemic is not over and that there are clear risks should policy support be reduced too soon.
• This argues in favour of the Riksbank retaining their projection of 0% rates out to the end of the extended forecast horizon, but contrasts with forward rates pricing, which continues to price in the chance of a rate hike from mid-2022. The introduction of a small chance of rate hikes in 2024 could bolster this pricing, whereas a commitment to 0% rates across the foreseeable future could prompt this pricing to flatten out somewhat.

Forward pricing eyes gradual tightening possible from 2022 onwards