MNI INTERVIEW: Rapid Rate Move Up More Plausible-Riksbank Head
MNI (STOCKHOLM) - A rapid move higher in rates is more likely than a sharp move lower in light of the turbulence caused by U.S. trade policy Riksbank Governor Erik Thedeen told MNI, after the Executive Board left its policy rate on hold at 2.25% and projected three years of unchanged rates.
While the central projection is flat, Thedeen stressed that policy could change rapidly and uncertainty is high. One of the Riksbank’s two alternative rate path scenarios assumed a substantial increase in tariffs in a tit-for-tat trade war between the EU and the U.S. as early as this spring, prompting Swedish rate hikes by June, while a downside scenario foresaw the policy rate lowered in response to progressively larger falls in household and business confidence.
"I think maybe it's easier to argue for a more rapid movement up [in rates), given that there are some specific risks that could push inflation up. And I'm ... talking about tariffs here. I guess that disinflationary forces which, for sure, also could be a reality might be slightly more gradual, a slower economy, cheap imports from China, that kind of scenario," Thedeen said, noting that the starting point was one of fairly high inflation.
CREDIBILITY AVOIDS HIKE
The Riksbank’s target CPIF inflation measure, the Consumer Price Index with a fixed interest rate, spiked from 2.2% in January to 2.9% in February.
"If you read the scenario we had in December, you could say we are on the higher ... hiking kind of scenario," Thedeen said. But he noted that rates were currently hold, and stressed that too much weight should not be placed on any scenario, as they are never completely accurate.
"You can't just follow the ... scenarios, I think they help to trigger a good discussion internally," he said.
One reason in Thedeen's view that the Riksbank can hold steady now is that it has earned credibility with rapid action in response to a recent surge then drop in inflation. (See MNI INTERVIEW: Riksbank Head Sees Turbo-Charged Policy Biting)
"We are getting rewarded for being credible. So without the credibility, I think we would would have moved today, right? Because without credibility, higher inflation prints would lead to higher inflation expectation ... we earned credibility ... following some fairly tough decisions," he said.
ECONOMIC ACTIVITY MATTERS
Thedeen accepted that inflation data could have justified a rate hike in March, though he said he preferred not to characterise the Riksbank’s recent policy actions as placing more weight on the weakness of economic activity as inflation has come back closer to target than it did when it was high, an approach that would be in line with economic loss-function models.
"Do we take the real economy into consideration? Yes, we do, because we would have hiked just because of the [inflation] numbers in February, January. That, of course, would have hurt the real economy," he said.
"I think we're trying to do this in a sound way, and the sound way is to keep inflation expectations anchored to have a credible forecast that they will go down to 2% and then act accordingly. And if that happens, to support the economy, which it does, in this case, it's good, right?" he said, adding that he wouldn't put a certain weight, or “lambda”, on growth at one point and then change it.
"If we are de anchoring, we need to be much more of an inflation nutter," he added.
DEFENCE SPENDING IMPACTS
One potential upside for currently weak growth comes from the planned hefty increases in defence spending in Sweden and elsewhere in Europe. The Riksbank is waiting to see how spending increases break down between military personnel and hardware and imports and exports to fully factor in the effects.
"This is not only Swedish defence spending, because we have a fairly large defence industry that probably will get orders, maybe from Germany, and that will also, of course, be important for those industries, but potentially also for the labour market ... and it's a fairly huge, it's big in Sweden as well," he said.
"We probably have ... maybe one percentage point more [of GDP] to spend, right, from two and a half to three and a half," but Germany is larger and with the spillover from the rest of Europe ..."there would be some positive growth effects."