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Repo rate path focus - what's hawkish and dovish?

RIKSBANK
  • A question we have been asked a lot is what does a hawkish path for the Riksbank repo rate look like in the forecasts to be released alongside the policy decision at 8:30BST / 9:30CET?
  • Remember that the Riksbank takes quarterly averages for the repo rates, so you have to back out the probabilities from the published averages (which isn't too easy when there are more than one meetings in each quarter). Also bear in mind that it is the date of the repo rate decision becoming effective (not the announcement date) that the Riksbank uses in its averages. So, let's say there is no hike today but the Riksbank is siganalling a June hike, that would still show up as a 0% Q2-22 repo rate average as the rate hike would not be effective until early July.
  • So let's put in what is probably a reasonable rate path of 75% probability of hikes at each of the next five meetings. That would see the Q3-22 average around 0.19-0.20%, Q4-22 at 0.44%, Q1-23 at 0.65% and Q2-23 at 0.87% based on our rough calculations. To us, that would probably still see a mildly hawkish market reaction (given that the Riksbank rarely puts 90%+ probabilities on any hikes).
  • Let's assume they did put 90% on June and 90% on September (and then 75%, 50%, 50% for the following hikes - again a hawkish path). Then we would have Q3-23 at 0.24%, Q4-22 at 0.52%, Q1-23 at 0.70% and Q2-23 at 0.84%.
  • What about 50% probabilities of hikes for the next five meetings? This would probably be a dovish outcome for the market. We would have Q3-22 at 0.13%, Q4-22 at 0.30%, Q1-23 at 0.44% and Q2-23 at 0.58%.
  • So in essence, we think the barriers for a dovish market reaction based on the repo rate alone are 0.6% or below for Q2-23 is dovish while above 0.84% or so would be hawkish.
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