Sweden Riksbank rises CPI pressure

The Riksbank cut benchmark repo rate by 10bps to -0.35%, whilst expanding QE by a further SEK45bn. With time running out ahead of key wage negotiations in 2016, the Riksbank needs to accelerate CPI back up to the 2% target and it has clearly targeted a weaker SEK as the quickest and most direct route.

The latest CPI figures show the trend acceleration in underlying inflation is still intact but the slow pace of CPI rise is a concern. This is particularly evident when compared toother CPI recoveries in the past. Underlying inflation will only hit the 2% inflation target in Q3-Q4 2017, assuming current recovery pace, too late for the next major collective wage bargaining round in 2016.

Collective bargaining is a key determinant in Sweden's labour market as the overall level of coverage is high estimated at 90%. The last round of negotiations in 2013 ended with an agreement for wages to rise 6.8% over three years or 2.3% per year.

Unless inflation picks up rapidly by then, employers will be in a strong position to negotiate down wages closer in-line with inflation, which in turn will put downward pressure on future inflation, making the task of battling low inflation even harder for the Riksbank, which is a clear risk for 2016. As such, CPI developments over the next few months will be crucial.

"The Riksbank has again hung the threat of more easing, but this time made it much clearer that intervention in the FX market is a very real possibility. SEK is expected to stay weak", says RBC capital markets.