MNI INTERVIEW: Hikes More Likely Than Cuts - Riksbank's Breman

The next moves by Sweden’s Riksbank are far more likely to be further tightening than rate cuts, First Deputy Governor Anna Breman told MNI, stressing that the balance of inflation risks remains to the upside.

While the Riksbank's central forecast shows the policy rate remaining flat at a high level for an extended period, in the so-called “Table Mountain” pattern similar to that currently projected by other central banks after the recent bout of surging prices, Breman said in an interview that officials had to be alive to persistent inflation risks.

“In the near future the likelihood of more rate hikes is much … higher than any rate cuts going forward. Rate cuts are not being discussed," she said.

Updated quarterly projections in the Riksbank’s September Monetary Policy Report showed the policy rate rising to 4.1% from the current 4.0%, implying only a 40% chance of another 25-basis-point hike with the rate holding near steady over the next two years.

“We clearly have a policy rate path that looks like a Table Mountain rather than [the] Matterhorn but then, of course, it is a forecast,” Breman said. “I think it's perfectly reasonable to have a policy rate path as long as you stress that it is a forecast with uncertainty.”

While the Federal Reserve and the European Central Bank among others have stressed that their policy settings are data-dependent, Breman prefers not to use the phrase.

“The only issue I have with data dependence is that it might sound a too backward looking - like you wait for the data and then other variables that are more forward looking will be changing at the same time," she said, adding that the Riksbank’s approach was better described as forecast-dependent.

UPSIDE RISKS

September’s MPR showed inflation on the target CPIF measure, CPI with a fixed interest rate, running above the Riksbank's 2.0% target until the third year of the forecast and Breman warned that the risks are tilted to a higher rate of increase in prices, though she stressed also that such an outcome would not automatically trigger higher rates.

“I still see risks on the upside and it's not quite symmetric,” she said. “When you sit as a policymaker and have to consider the effects of this in the long run, especially when you come in from a high inflation environment .. we have to be very vigilant to some of those risks materialising."

Still, the outlook has improved, with fundamentals suggesting inflation should continue to decline, as economy-wide pay deals total 7% over two years and as external inflation pressures ease.

“The key thing right now is that we actually see some very favourable conditions in terms of getting inflation down. Long-term expectations remain well anchored. Social parties have shown lots of responsibility, wage growth is moderate. We're seeing global demand slowing because of the global tightening cycle … We're seeing actual inflation coming down," she said. “The key issue is just to stay really vigilant in terms of setbacks and also communicate that we have a good scenario here where inflation moves really smoothly but we have to be prepared for setbacks.”