MNI INTERVIEW: Riksbank Eyes Krona In Dovish Shift-Governor
Erik Thedeen tells MNI that investors should not overestimate the Riksbank's dovishness.
The Riksbank wants to avoid sending an excessively dovish signal which would undermine the krona, its Governor Erik Thedeen told MNI after Sweden’s central bank signalled that a rates cut in the first half of the year could not be ruled out.
Investors should not misinterpret the Riksbank’s shift from its previous projection showing that a first cut of the cycle will not come until next year, Thedeen said in an interview after the rates-setting meeting. He also stressed the need for the RIksbank to reduce its bond holdings, given the relatively small size of its debt market.
"There is a risk that if we were to aggressively send a signal that we would be much more dovish ... than the ECB then it is likely that that would have a negative effect on the krona. That is not the message that we are sending," he told MNI, adding that investors sometimes overplayed the likely impact of small changes in rate differentials on exchange rates. The krona weakened by 3% in 2024.
"For sure, I think this trend since the year end is not positive ... if it depreciates a lot from these levels that would have implications for monetary policy," he said.
The Riksbank’s board also announced that it was stepping up its asset sales from SEK 5billion to 6.5billion a month. Active quantitative tightening is easier than elsewhere in Sweden, with its relatively low public debt-to-GDP and weak debt supply, he said.
"QT is bringing up supply to some kind of normal level. If you compare that to the UK, the U.S., Italy, whatever, they have substantial supply already, so it is not hard to understand why they are ... less eager to do active QT than we are because the risk of any stress in the market is higher if you have a high debt level," he said, though he noted that debt levels were not the only consideration for other central banks, such as the Bank of England, which is also pressing on with asset sales.
BALANCE SHEET
Asked how he saw the final size of the Riksbank's balance sheet, Thedeen said that while it was still too early to comment on internal discussions on the matter, for his part he tends not to favour central bank ownership of private-sector assets.
"We are not eager to own private bonds, the mortgage bonds and the corporate bonds will not have a natural place in our balance sheet. That was a crisis measure," he said.
Sweden's National Audit Office published a highly critical report of the Riksbank's QE programme and the central bank is set to publish its response on Friday.
Losses on QE will also mean the Riksbank will be legally required to recapitalise. While the Riksbank and the National Debt Office have yet to announce a precise timetable or indicate the nature of any fresh debt issuance, the new Riksbank Act stipulates that recapitalisation is required when the central bank’s equity falls below SEK20 billion, something which will be confirmed in its annual report. (See MNI INTERVIEW:Sweden Likely To Borrow To Cover Riksbank Losses)
"That points to an end-March, beginning of April kind of date, but we haven't set it," Thedeen said, adding that the debt office needs "to have it in their plans to, let's say, increase the short-dated instruments like the Treasury bills. This is fairly easy task to do ... The main thing is we need to have a dialogue.”