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MNI INTERVIEW: Riksbank Only Needs Gradual Hikes - Gov Thedeen

(MNI) London

Sweden’s rising inflation risks justified a move by the country’s central bank to signal more monetary tightening than previously anticipated, though price pressures for the moment are low enough to permit a more gradualist approach to rate hikes than taken in other developed nations, Riksbank Governor Erik Thedeen told MNI.

The Riksbank earlier on Thursday increased its policy rate by 25 basis points to 3.75%, and raised its projected cycle peak, signalling another hike is likely this year. While the Bank of England and Norway’s Norges Bank both hiked 50 bps this month, Thedeen said the Riksbank had room to move more slowly. (See MNI RIKSBANK WATCH: Swedish Central Bank Signals Another Hike)

"They have slightly difference inflation dynamics. The UK is a little bit of a special case because they have, I would say, worse dynamics than we have. Much higher wage growth, for example. In Norway they paused, and then went for this hike of 50. I think we have room to do this a little bit more gradually," Thedeen said in an interview.

While the inflation projections in the Riksbank's Monetary Policy Report were little changed from those published at the time of its last decision April, it raised its projected rate peak to just over 4.0% from 3.6%.

"It is more the risk profile that has increased,” said Thedeen, pointing to future inflation risks even though the baseline forecast stayed largely unaltered. “I think that points to a more gradual approach.”


The Riksbank also published an alternative scenario in which krona weakness contributed to higher inflation, with the policy rate rising to 4.5% in response. The krona has hit its weakest levels since the global financial crisis but Thedeen warned against any assumption that currency moves would determine monetary policy.

"People are focusing too much on the krona, period. We focus on inflation," he said, though he acknowledged the risk that publishing the alternative scenario could turn still more attention to the currency.

"We had that internal discussion .. We have a scenario dependent on the krona .. What we are trying to persistently communicate is that the krona has an input to inflation. That is why it is relevant, it's not relevant per se," he said.

The Riksbank could have drafted a scenario in which the krona weakened further and inflation still fell if other factors pushed in the opposite direction, he said.


Thedeen stressed that what matters most to the Riksbank are underlying inflation pressures and these were key to the extra 25bp hike included in its June forecasts.

"The story is that, of course, we are focusing a lot on the underlying [inflation] as we know that the dynamics of the headline [inflation] are very much a story about energy prices. If we don't get underlying inflation right then we will not succeed with headline inflation either," he said.

"It is very much also about risk. So, basically, we have a high underlying inflation, it seems to be fairly persistent in some parts of retail, in the service sector and that is why we increased the risk there. And that is also supported by pretty strong demand. And then, of course, the krona adds to that risk," the Riksbank head said.

The central bank also stepped up the pace of asset sales, to SEK5 billion a month, but Thedeen said this was due to strong demand for earlier sales and a desire to help market liquidity.

Asked if this quantitative tightening weighed on inflation Thedeen said "Marginally. I would say normalisation of the balance sheet, better functioning of government security markets, that is the external effects. The effect on inflation is marginal because the effects on interest rates are marginal."

MNI London Bureau | +44 203-586-2223 |
MNI London Bureau | +44 203-586-2223 |

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