Franklin Templeton Fixed Income talk Norges Bank, Sveriges Riksbank, Swiss National Bank and Bank of Japan
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Norges Bank
Another hawkish push
After striking a more cautious tone in December, NB hiked for the ninth time in this cycle in March, bringing its policy rate to 3%. Stronger-than-anticipated activity data, a tight labor market and upward revisions to wage projections contributed to the renewed hawkish stance. NB made clear that another critical factor behind the decision was the recent marked depreciation of the Norwegian krone. The rate path was revised upward, and it now envisages hikes at the next two meetings and a terminal rate above 3.5%, somewhat higher than what we anticipated but within the risks we flagged of a prolonged tightening cycle from the major global central banks. We see two more hikes as broadly deliverable, absent significant ramifications stemming from market turbulence, as the need to “out hawkish” the ECB and sustain the krone remains compelling. We see no cuts before mid-2024, in line with the bank’s forecast.
Sveriges Riksbank
Hiking into a recession
The Riksbank raised the repo-rate by 50 bps in its February meeting, but delivered a hawkish signal to markets. Despite the Swedish rate-sensitive economy contracting in the fourth quarter, inflation remains a major concern as core components continue to surprise on the upside. The policy rate path was raised further, signaling two more hikes in the coming months and no cuts throughout the forecast horizon (to 2026). A strong focus on the currency’s role in fighting inflation was noted; the Swedish krona sensibly depreciated over the last few months, explicitly underscoring its dependance on other “neighboring” central banks’ actions (particularly the ECB). Moreover, active bond sales were also announced starting from April, after having stopped reinvestments since the start of the year. This accelerates the balance sheet shrinkage and puts further pressure on yields. We expect a further 50-bp hike in April and a final one of 25 bps in June, conditional on the ECB rate trajectory, bringing the terminal rate up to 3.75%.
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Swiss National Bank
Inflation overrides banking sector concerns; more tightening in the pipeline
Despite the recent turmoil in the Swiss banking sector, the SNB lifted its policy rate by 50 bps in March. The prompt response from Swiss authorities to prevent financial contagion likely paved the way for the SNB to prioritize price stability over financial stability. Not only did the SNB’s policy statement make clear that further rate rises cannot be ruled out, but its upwardly revised inflation forecasts for 2023 and 2024 also indicate that the SNB is not done with policy rate hikes. This is not surprising given the unexpected acceleration in consumer prices in January and February. While imported inflation has risen, SNB Chairman Thomas J. Jordan also noted that the acceleration in services inflation is indicative of strengthening domestic price pressures. We believe the SNB, with a widening policy gap with the ECB and Fed, will likely hike by another 75–100 bps in total. We also expect the SNB to continue to sell foreign currency reserves (as it did during 2022) to prevent currency depreciation. A significant tightening in global financial conditions could, however, allow the SNB to be less aggressive on the rates front.
Bank of Japan
Stars are aligning!
After a surprise BoJ policy tweak in December 2022, markets have been calling for further policy action by the central bank, which it has been shrugging off by insisting it wants to see more sustained inflation to make a move. We have been more bullish on Japanese inflation, which is finally manifesting through higher services inflation (running positive on a y/y basis for last six months) and brighter wage prospects (the first round of the latest Shunto wage negotiations emerged as the highest in three decades). We believe the closure of the output gap, along with improving consumption as wages improve and fiscal measures kick in, will prompt the BoJ to begin withdrawing policy accommodation. A new BoJ governor in Kazuo Ueda could help eliminate legacy issues. First, we expect an end to the YCC framework by the second or third quarter of 2023 to normalize the bond market. A lift-off in rates will take longer, once the BoJ is convinced on the sustainable 2% inflation target. We believe this will be more data dependent, in the form of higher services inflation and wage growth, which could prompt an action in early 2024.
