MNI INTERVIEW: Inflation Confidence Key To Fast Cuts -Thedeen
MNI (STOCKHOLM) - The Riksbank is able to ease policy faster than its peers because of its confidence in reaching its inflation target, Governor Erik Thedeen told MNI on Wednesday, adding that concerns over slow growth would be a factor when the Swedish central bank decides whether to make a 50-basis-point cut in coming meetings.
The Riksbank, like other central banks including the Bank of England, says it is pursuing "gradual" easing but while the BOE held policy this month the Swedish central bank is pressing ahead with cuts, announcing a 25bp reduction in its policy rate to 3.25% and shifting its rates projection lower on Wednesday.
Thedeen said the key difference with other central banks was the degree of confidence in being able to meet the inflation target rather than any desire to return more speedily to the neutral rate. Estimates of neutral, which the Riksbank will re-evaluate by its December meeting, are not key to policy setting, he said.
"If you have a view that you probably will go lower it is better to do it gradually because then you can evaluate it as you go along ... That evaluation period will be shorter if you are safer with the inflation outlook, as we are in Sweden, but maybe other central banks are less safe with their forecasts on that, hence they will move a little bit slower and evaluate in longer intervals," Thedeen said in an interview.
The Riksbank’s September rates projection showed it could cut two more times this year and that one of those cuts could be 50bp, before it takes the rate down to around 2.25% and holds it there. But in the absence of a precise estimate of neutral for the moment it is happy to feel its way towards easier policy.
FEELING THEIR WAY LOWER
“We are now gradually lowering rates and then we are seeing what happens in the real economy,” Thedeen said. “We don't know if 2.25% is the neutral rate ... we will get back to it. It is not that important for the current rate policy whether the neutral rate is 2.25%, 2.5%, 2.75%. We are above but we are lowering it [the policy rate] pretty fast so we have momentum from that feeding into the economy and then we have to test how the economy reacts [to] the interest rate cuts.”
Inflation on the Riksbank's target measure, CPI with a fixed interest rate, is already below target and its updated forecasts showed it staying there.
Asked which key data he had in mind for deciding between 25 and 50bp cuts in coming meetings, Thedeen noted that he had said publicly that he had none, but added that "it is also true reading our report that we are concerned about the slow pace of the upturn in the economy ... but we have an inflation target, so of course the inflation outlook in the end will be the decisive point and that, of course, is the combination of many indicators." (See MNI INTERVIEW: Riksbank Could Cut 2-3 Times More In 24-Gerlach)
BALANCE SHEET
The Riksbank is set to comment on the future shape of its balance sheet before the end of the year. Thedeen said the key issue is the central bank’s holdings of longer-dated government bonds while questions over its use of a corridor system, under which it aims to stabilise interest rates between overnight deposit and lending rates, are less urgent. (See MNI INTERVIEW: Riksbank QT Boosts Bond Market - Debt Head)
"First of all we will say something about the ... portfolio of Swedish government bonds. We have not said we have changed our steering system so we have a corridor system but it is a little bit of a question mark around it because we actually are in an excess reserves system and also because of the international discussion ... There is a lot of discussions going on between central banks, even in the Basel Committee [on Banking Supervision], which I chair," he said.
Asset purchases through quantitative easing, which created large amounts of central bank reserves, blurred the distinctions between the corridor system and ample and excess reserve regimes.
"For sure, this is something that we need to revisit. But we don't need to hurry on that," he said, “but what is pressing is to get a message out on the long-term bond portfolio.”