At the CBI press conference this morning, it emerged that new investments, on the one hand, and outflows stemming from the removal of controls on offshore krónur, on the other, have more or less offset one another. The stock of offshore krónur in the CBI’s accounts has shrunk by about ISK 10bn since the controls were lifted at the beginning of this month. It is unlikely, though, that this entire amount has been exported via the foreign exchange market. In particular, the large position that was discussed in connection with the maturity of the RIKB19 Treasury bond, and about which the CBI expressed concerns in its statement to Parliament, has not exited through the FX market to any significant degree, according to the Governor. Inflows into the stock market and Treasury bonds have played a role in the recent appreciation of the ISK, and outflows stemming from pension funds’ investments have eased in the recent past.
Wage agreements a key factor in policy rate developments
The forward guidance in today’s MPC statement is repeated verbatim from the Committee’s last statement:
The near-term monetary stance will depend on the interaction between a narrower output gap, wage-setting decisions, and developments in inflation and inflation expectations.
The MPC reiterates that it has both the will and the tools necessary to keep inflation and inflation expectations at target over the long term. This could call for a tighter monetary stance in coming months. Other decisions, particularly those relating to the labour market and fiscal policy, will be important in determining whether that will be the case and will affect the sacrifice cost in terms of lower employment.
It seems clear that the outcome of the ongoing wage negotiations will be a major factor in whether the policy rate is increased before mid-year. In our most recent inflation forecast, we estimate that the wage index will rise by 6.5% in 2019. This is similar to the forecast published by the CBI February. If wage increases this spring turn out substantially larger than this, we expect the CBI to respond with a rate hike in May or June. That said, our opinion is unchanged, in that we consider an unchanged policy rate the most likely outcome, although we do not exclude the possibility of a rate cut in H2 — provided that wage agreements provide for relatively modest pay rises.