Today, the Riksbank will probably stick its head forward in the central banking field, by cutting the key interest rate, up 25 basis points to 3.75 percent. At the previous meeting in March, Thedéen and co. stated that “the need for a tightening monetary policy diminishes when inflation falls towards the target and economic activity is weak. If the inflation outlook continues to be promising, the interest rate can probably be cut in May or June.” In the time since the meeting, the underlying inflation has been clearly on the downside of the Riksbank’s estimate, while the GDP figures testify that a mild recession has turned into stagnation – as the central bank had expected. A further increase in unemployment, to 8.6 per cent in March, also points in the direction of an interest rate cut now.
It is still a “close call”. The monetary policy committee may choose to wait, in that case primarily because expectations of delayed interest rate cuts in the USA contribute to negative pressure also on the Swedish krona, which in turn may give rise to unwanted inflationary impulses. The market has priced in approximately a 70 percent probability of a cut today. 13 out of 20 analysts in Bloomberg’s survey expect the same, while the remaining seven think the central bank will wait. Read Oddmund’s advance review of the meeting here.
Are US interest rates high enough to overcome inflationary pressures? This question was the subject of Neel Kashkari’s essay, which gained attention when it was published yesterday. Here, the head of the Minneapolis Fed points out that the housing market has been surprisingly resilient compared to previous episodes where monetary policy has apparently been similarly tight. Housing investment is an important impact channel for monetary policy. The resilience may, together with a still solid labor market and a sideways inflation trend in the first quarter, be a sign that the neutral level of the interest rate (the level compatible with stable economic development and low and stable inflation) is higher than before, in the least in the short term.
A perception that the neutral interest rate may be temporarily higher is not so easy to convey through the Fed’s communication tools, writes Kashkari. The FOMC only operates with a “dot plot”, where we see the members’ estimates of the neutral interest rate in the long term. Here, Kashkari has contented himself with a moderate upward adjustment of his estimate, from 2.0 to 2.5 percent.
The Minneapolis Fed chief, who does not have the right to vote in the FOMC this year, is nevertheless no stranger to the idea of interest rate cuts this year. At a conference yesterday, he said that he will probably estimate somewhere between zero and two cuts by the end of the year when the committee meets again in June. He also believes that an interest rate jump is a long way off for the committee, although he would not rule out that it could happen.
In the key figure-poor 24 hours behind us, the dollar has strengthened on a broad basis. While European stock exchanges rose yesterday (the main Stoxx 600 index by 1.1 percent), the mood on American stock exchanges can best be described as measured, with sideways development for both the S&P 500 and Nasdaq. Today has started a little sour, with a decline on Asian stock exchanges. The Norwegian krone has weakened over the past 24 hours. EURNOK and USDNOK are quoted at the time of writing at 11.76 and 10.94, respectively eight and nine euros higher than Tuesday morning.
While we are free tomorrow, the Bank of England will publish its interest rate decision. We expect that Bailey and co. will tread water and maintain its data-dependent approach to interest rate setting going forward. We ourselves believe that the first cut in the British key interest rate will take until November. Read Knut’s preliminary review here.
