MNI RIKSBANK WATCH: At Least One More Hike After 50Bps In Feb

The Riksbank hiked its policy rate by 50 basis points to 3.0% as expected on Thursday and said that it expected to hike again when it next meets in April and will also begin to sell bonds, amid concerns over persistent inflation and a weak krona.

The Riksbank raised its projected rate peak to 3.33% from 2.84%, and stated that the policy rate “will probably be raised further during the spring.” Given that it only has five policy meetings a year, this points to the April meeting.

The rate projections showed the policy rate flatlining at the 3.3% peak into the first quarter of 2026, with the Executive Board not yet prepared to signal any reversal of the planned tightening.

Although the Riksbank in comparison to other central banks brought many relatively short-dated assets through quantitative easing, which will facilitate fairly rapid balance sheet shrinkage via natural run-off, it also announced plans for asset sales starting in April. It will sell longer-dated and inflation-linked goverment bonds at a pace of SEK3 billion and SEK500 million respectively per month.

LIQUIDITY CONCERNS

In his previous job at the head of the financial regulator, new governor Erik Thedeen had repeatedly highlighted concerns over reduced liquidity in Swedish bond markets because of Riksbank holdings. The board stated that the asset sales should lead "to an increase in the volume of safe and liquid assets" which should encourage investment flows and "contribute to a stronger krona and improve the Riksbank’s capacity to reduce inflation."

The inflation forecasts in the quarterly Monetary Policy Report were little changed for this year, at 5.5% on the target CPIF measure versus 5.7% previously, with CPIF for 2024 raised to 1.9% from 1.5% and cut to 1.9% in 2025 from 2.0%. These projections suggest that inflation will return sustainably very close to target with the policy rate held at 3.3%.

Growth forecasts were also little changed, with the economy seen contracting 1.1% in 2023 compared to a fall of 1.2% in the previous projection and expanding 0.9% in 2024 compared to 1.0%. Unemployment this year was forecast to be 8.0%, up from 7.9%.

The report highlighted risks posed by currency depreciation, stating that "if the krona continues to be weak, it will be considerably more difficult for the Riksbank to return inflation to the target more permanently."