MNI INTERVIEW: Fed, ECB Cloud Riksbank Easing Outlook- Thedeen

Volatile U.S. rate expectations and the difficulty of anticipating European Central Bank policy beyond an expected cut in June make it more difficult for the Riksbank to be sure it will go ahead with the two rate cuts it says it expects to make in the second half of the year, the Swedish central bank's head told MNI following its first cut at the May meeting.

An already-weak krona could be further affected by changing interest rate differentials with other major central banks, complicating monetary policy calculations, Erik Thedeen said in an interview after the Swedish central bank made its first rate cut of the cycle, reducing its policy rate by 25 basis points to 3.75% and indicating that two further cuts were likely in 2024.

"It’s easier for us to move where there's more certainty around us, but that is not now," Thedeen said, adding that this month’s cut "was a decision that was taken with some uncertainty, although I think it seemed to be fairly certainly where the ECB is” with regards to its likely June rate cut. (See MNI INTERVIEW: Krona A Factor In Riksbank Cut Timing - Thedeen)

The Swedish central bank head contrasted surprises delivered by the U.S. economy with Sweden, where inflation has come down and the economy weakened pretty much as anticipated.

UNCERTAINTY

"To be fair to the Fed their economy has shifted direction ... whereas the Swedish economy in the last half year or so has been very much in line and that makes it more certain, or more precise, what we might do. Having said that, we might change as well, who knows, because it's a very, very uncertain environment we're living in," he said.

There is always uncertainty around rate decisions by the ECB, which unlike the Riksbank does not publish its own rate path, Thedeen noted.

Domestic demand is playing a greater role in the Riksbank’s decision-making now that the price surge from supply-side shocks has subsided and inflation, at 2.2% in March, has neared its 2.0% target, at 2.2%, the Swedish central bank chief said.

"If you're very much off target, your focus will be on what your very-off target, inflation," he said.

"We do not have a dual mandate, we have one mandate. So that says that inflation will always be ... the thing that we'll look at. But what I think the inflation dynamic is now, maybe more than it was a year ago, is it also driven by demand issues, less supply issues and more demand issues. And, of course, then factors like unemployment and things like that had larger effect on your inflation forecast.”

QT TO CONTINUE

While the Riksbank is now cutting rates, Thedeen said that the decision to press ahead with accelerated asset sales was appropriate in Sweden’s relatively small bond market despite recent research from the Bank of Italy and others which has suggested that quantitative tightening may have a marginal constricting effect.

"There is a little bit of difference in the Swedish case compared to many other countries and that ...is that we are doing this in a market that is longing for supply, which has been under-supplied with safe securities ... where the liquidity has been very bad,” he said, “So this has been a welcome decision from the market structure, market functioning kind of argument rather than whether it will tighten monetary policy by a couple of basis points or not.”

The Riskbank is undertaking "intensive work" on what the final, or steady state, of the central bank's balance sheet should be, with a decision due this year, he added.