MNI STATE OF PLAY:Riksbank Hikes 50bps, Front-Loads Tightening

Sweden’s central bank hiked its policy rate by 50 basis points in June to 0.75% as expected and signalled rapid further tightening before pausing at around 2.0% from early 2023.

The Riksbank Executive Board's collective rate path points to tightening again by 50-bps in September and November, the two remaining meetings this year. Then, after hitting 2% quickly, the policy rate is seen drifting to 2.06% by the end of the three-year forecast period, 25 bps above the 1.81% peak foreseen in its main scenario in April.

"By raising the policy rate more now, the risk of high inflation in the longer term is reduced and thus also the need for greater monetary tightening further ahead," the Board stated.

The Riksbank will also halve the pace of asset purchases in the second half of this year from SEK37 billion to SEK18.5 billion, below the quarterly SEK38 billion level of redemptions, allowing its balance sheet to shrink.

Detailed analysis in its Monetary Policy Report highlighted early signs that price setting and wage formation are factoring in above-target inflation, increasing the risk of a price spiral.

KRONA STRENGTH

The Report's projections, however, showed that if the central bank acts early and fast inflation could return fairly swiftly to target. With the policy rate rising rapidly to around 2.0% the target CPIF measure was shown falling from an average 6.9% in 2022, and over 7% through the rest of this year, to 2.0% in 2024.

The krona, having depreciated by around 4% on its trade-weighted index since the start of the year, was expected to appreciate gradually as policy tightens, favouring rate differentials.

The MPR also highlighted some weak spots in the economy. Unemployment was shown edging up from 7.5% this year to 7.9% in 2024, but the central bank thinks that there is little spare capacity left in the labour market and that equilibrium joblessness is now higher now than prior to Covid, with the pool of idle workers seemingly less suited to jobs available. (See MNI INTERVIEW:Swedish Hiring Data May Reflect Worker Shortages).

The MPR also put the spotlight on housing market weakness, predicting that prices would fall as mortgage rates rose and as higher demand for larger living spaces during the pandemic faded. While the central forecast was for house prices to remain above pre-pandemic levels, "one risk is that the adaptation process will be abrupt and that housing prices will fall considerably," the MPR stated.

In April, the Board had also published an alternative interest rate path, showing the policy rate peaking at 2.55% in 2024. It provided no alternative path this time.