EU BASIC INDUSTRIES: Sika: 9M25 Results     

NAB now see the RBA on hold at 3.60% until May, (they previously forecast cuts in November and February). They expect a 25bp cut in May to be the final of the cycle, which would leave the terminal rate at 3.35%.

• NAB write “today’s CPI data point to a 0.9%-1.0% Q/Q outcome for Q3 trimmed mean, which would be a 0.3ppt upside surprise to current RBA forecasts”… “The detail shows that market services inflation is significantly hotter than we expected”.
• They note that “for the RBA, this means considerably less certainty that inflation has settled near 2.5% and highlights the likelihood that it will take a period of modestly restrictive policy for inflation to settle at 2.5%”.

The NZ government has appointed Riksbank First Deputy Governor Anna Breman to be the new RBNZ governor. Breman will start the position on December 1 of this year on a 5-year term. She will leave the Riksbank on October 10. 

• Breman is an experienced economist, previously Chief Economist and Global Head of Macro Research at Swedbank before her time at the Riksbank (alongside roles in the Swedish Ministry of Finance and the World Bank). She joined the Riksbank in 2019, becoming the Board’s number 2 in 2022. Three points to consider around Breman’s transition into her new role:
• Mandates: The Riksbank and RBNZ have similar mandates. The RBNZ aims to keep inflation “between 1% and 3% on average over the medium term, with a focus on keeping future average inflation near the 2% target midpoint.”. Meanwhile, the Riksbank targets a 2% inflation rate, with a “variation band” of 1-3% (note: “Without neglecting the inflation target, the Riksbank shall moreover contribute to a balanced development of output and employment”).
  • Note that in recent monetary policy deliberations, Breman has been one of the more dovish members of the Executive Board. She has advocated for additional rate cuts to support economic activity given inflation is considered to be consistent with the 2% target in the medium term (that rate cut was delivered at yesterday’s decision).
• Rate Path Projections: Both central banks publish a rate path once a quarter to supplement monetary policy communications. During her time at the Riksbank, Breman actively highlighted the uncertainty surrounding rate path projections, particularly further out the forecast horizon. The Riksbank has formally communicated that the first three quarters of a new rate path projection is “owned” by the Executive Board (and is intended to be a policy rate signal), while the rest of the curve is a function of staff models, and should not be over-interpreted as a signal.
• Alternative Scenarios: In its quarterly MPR reports, the Riksbank usually provides at least two alternative scenarios for the policy rate, GDP and CPIF inflation. While not an explicit policy signal, these scenarios are meant to illustrate the most pressing risks currently facing the central bank’s mandate, and possible reaction functions. Breman has stressed the usefulness of these scenarios in internal and external communications, so could consider introducing a similar framework at the RBNZ.
• The Riksbank Executive Board will have four members until Breman’s replacement is appointed, with Governor Thedéen holding the deciding vote in the case of a tie. With the Riksbank now widely expected to be at the end of its easing cycle, this shouldn’t have a major impact on market expectations for the policy rate. 

• The DMO will return to the market this morning with GBP4.75bln of the short 5-year 4.375% Mar-30 gilt on offer.
• This is the same size as the two prior auctions of this size.
• Auctions of this gilt have been very successful, with the last three auctions seeing tails of no more than 0.2bp (and no auction since the launch seeing a tail wider than 0.4bp).
• With the exception of the April auction the bid-to-covers have all been in excess of 3x (and the April auction saw a 2.95x bid-to-cover) with the last auction seeing a 3.15x bid-to-cover.
• We don't think that yesterday's disappointing 30-year auction will have any impact on this auction and continue to expect a strong auction for the 4.375% Mar-30 gilt.
• Timing: Results will be available shortly after the bidding window closes at 10:00BST with a further GBP1.1875bln available to successful bidders via the PAOF.