Previews: Swedish Riksbank and Bank of Canada

October 18, 2010

Monetary policymakers are holding their penultimate interest rate meetings of 2010 this week and will be announcing their decisions on Tuesday.  Each of these banks has begun to normalize interest rates, but neither is likely to extend that process at this time.  Sweden’s repo rate will hold at 0.75%, and Canada’s overnight money rate should stay at 1.0%.

When the Riksbank repo rate was raised by 25 bps each on July 1 and September 2, not all six policymakers supported the decision.  In the latter instance, Svensson objected to the rate hike, and Ekholm favored a flatter future path of rate increases than the majority.  The majority’s projected average interest rate of 0.9% in the fourth quarter implies an increase at the final Riksbank meeting in December, not now.  Sweden has experienced sounder economic growth than other European nations, leading officials in September to assume that GDP rises by 4.1% this year and 3.5% in 2011.  It makes sense for the Riksbank to lead other European central banks in normalizing policy, and the 0.75% rate remains 400 basis points lower than it previous cyclical peak in 2008.  However, officials need to take care that they do not proceed so aggressively that the krona appreciates unduly and depresses the economy.  Sensitivity to currency wars is even more prevalent now than seven weeks ago, so a desire for gradualism will be highlighted in tomorrow’s Riksbank statement.

The Bank of Canada implemented rate increases of 25 basis points at each of its previous meetings on June 1, July 20, and September 8.  The third increase was undertaken despite an admission at the time that “economic recovery in Canada [had been] slightly more gradual than projected in the July Monetary Policy Report.”  External circumstances account for this shift.  The statement in September mentioned “a weaker profile for U.S. activity,” but Canadian dollar appreciation would now be an additional worry in light of a 5% advance of the loonie since the September meeting.  Last Thursday saw Canada’s currency touch 0.9977 per U.S. dollar, a six-month high.  Several Canadian statistics meanwhile confirm slower growth.  A 0.1% dip of real GDP in July was the first monthly decline in 11 months and followed gains of 0.2% and 0.1% in June and May and no change in April.  In July, wholesale turnover and retail sales had each slipped 0.1%, and jobs dropped by 6.6K last month.  Building permits fell 9.2% in August, and housing starts declined 1.5% in September.  Not every statistic has been softer than forecast, however.  The IVEY-PMI index leaped to 70.3 in September from 65.9 in August and also surpassed readings of 61.7 a year earlier and 61.3 in September 2008.  That’s a meaningful comparison because this indicator doesn’t get adjusted for seasonal variations.  Factory sales and orders rose 2.1% and 5.3% in August, and the trade deficit in August was 47% smaller than the month before, reflecting a 2.9% increase in export volumes. 

Canada has benign inflation, so the Bank of Canada can afford to proceed with caution and take a pass at this time.  Consumer price inflation was at 1.7% overall and 1.6% for core items in August.  Prices in the past three reported months increased 1.4% annualized and by merely 0.8% for the core index.  Since the Bank of Canada raised rates in early September, Fed officials have given a much stronger signal of intent to resume quantitative easing at their early November meeting.  That shift could drive the Canadian dollar through U.S. dollar parity in a more sustainable way, which would be regrettable.  Prudence dictates that Canadian monetary officials take a wait and see stance at this time.  A new Canadian rate statement will be posted on the Bank of Canada web site at 13:00 GMT Tuesday.  The central bank’s Monetary Policy Report will be published two days later.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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