MNI INTERVIEW: Krona A Factor In Riksbank Cut Timing - Thedeen

The Riksbank will take account of the interplay between the exchange rate and European Central Bank monetary policy when it decides whether to make its first policy rate cut of the cycle in May or June, Governor Erik Thedeen told MNI on Tuesday.

The Swedish central bank chief said ECB signalling, which currently points to a likely cut in June, could have a spillover effect for the krona.

"That's something we'll need to look into when we sit down in May. If there is more or less a 100% likelihood of a June [ECB] cut that would be priced into the market. If we then go in May or June it should from an intellectual point of view have limited relevance for the krona, right? That's in a rational world [but] we need to see the facts on where the krona is and where it's heading and make a decision on that," Thedeen said in an interview.

The Riksbank earlier on Tuesday left its policy rate unchanged at 4.0%, and its rate path indicated a roughly even chance of a first cut in either May or June. It pointed to only gradual easing thereafter, with the rate dropping to 2.6% three years ahead, suggesting at most six 25-basis-point cuts in that period.

R-STAR "A LIGHTHOUSE ON HORIZON"

Thedeen said the Riksbank judged the neutral rate of interest was now towards the lower end of its pre-Covid estimated range of between 0.5% to 2.0% in real terms, or 2.5% to 4.0% nominal. This would suggest that the central bank expects policy to remain restrictive throughout its forecast period.

"I think I would stick to that still. That 2.5%-ish would probably be our guess today and that would imply 0.5%, 0.6% R-star and then 2.0% inflation," Thedeen said.

But, he added, Riksbank policy is not “super-dependent on the analysis of R-star. We see that as more of a lighthouse on the horizon ... The way to that lighthouse is going to be bumpy. That is why we are talking about this gradual [rate] decrease.”

Still, he accepted that this means the central bank is adopting an approach of continued restrictive policy, "if you see it in that theoretical [way]. That is also why I said that the interest rate path beyond the first three quarters is ... very uncertain. Let's see where we end up.”

While services inflation in Sweden has, as elsewhere, been more persistent than overall inflation, Thedeen noted that the detail in the National Institute's survey of firms’ price-setting intentions provides some reason for comfort.

"We have been worried about sticky service sector [inflation]," he said, but looking at the data in detail, "it turns out that part of this increase or stickiness has been in administrative pricing, prices from municipalities, things like that. So if you look on the underlying demand-driven inflation it seems to be slightly more well behaved. But again, we are not complacent. This is where we are also looking for more confirmation before we go for interest rate cuts," he said.

"We need to look into that further but I think the overall picture on price-setting behaviour is more in line or even in line with the inflation target.”