MNI RIKSBANK WATCH: Last Chance Saloon For Hike

Sweden’s central bank will weigh above-target inflation against economic contraction at its November meeting as it ponders whether to raise the policy rate by 25 basis points in what would probably be its final hike this cycle or to hold at 4.0%.

The Riksbank's September forecast showed the policy rate peaking at 4.1%, suggesting a-less-than-evens chance of a hike on Thursday. But central bank officials have been keen to stress that tightening may not have concluded, with First Deputy outweighed Governor Anna Breman telling MNI that the probability of future hikes far exceeds that of cuts. (See MNI INTERVIEW: Hikes More Likely Than Cuts - Riksbank's Breman)

In the absence of clear messaging from policymakers in recent days to steer expectations, the only consensus amongst analysts is for a close decision.

If the central bank were to hold it is hard to see how keeping the same projected rate path or nudging it up would persuade market participants that another hike was plausible. Market pricing for other advanced economy central banks, such as the Bank of England and the European Central Bank, suggests hiking is over, with debate beginning to switch to the timing of the first cuts.

KRONA

But a hold would risk undermining the krona, potentially fueling import price inflation. Riksbank officials have repeatedly tried to talk up the currency, calling its recent weakness unjustified by fundamentals, and it has strengthened markedly over the past month as rate curves have declined in the euro area, the UK and the U.S.

October inflation overshot forecasts in the Riksbank’s September Monetary Policy Report, with the target CPIF measure, a consumer price index with a fixed interest rate, rising to 4.2% on the year from 4.0% the month before and exceeding the 4.08% prediction. CPIF ex-energy came in at 6.1% versus the Riksbank's forecast of 5.95%, with services at 6.6% compared to the 6.46% foreseen but CPIF has tumbled from its peak of around 10% at the end of 2022.

Sweden’s economy is also contracting. GDP decreased by 0.5% in September and was 3.0% down on the year, calendar-adjusted, while it was just above zero in the third quarter compared to the second. The Riksbank forecast a contraction of 0.1% in 2024, following a 0.8% fall in 2023.

The Riksbank’s stated policy approach is to find a balance between rapidly bringing inflation back to target and the effects on real economic developments, with its rate projection incorporating the trade-off.