MNI INTERVIEW: Riksbank Head Sees Policy Risks Balanced
MNI (STOCKHOLM) - Tariffs floated by U.S. President-elect Donald Trump could have large negative economic effects even if used mainly as a threat, Riksbank Governor Erik Thedeen told MNI, pointing also to U.S. fiscal stimulus as a potential inflationary risk.
In its December Monetary Policy Report, the Riksbank published a detailed scenario outlining the possible impact of 20% U.S. tariffs on all imports followed with the rest of the world responding in kind, leading to a modest policy rate rise as inflationary effects are partially offset by weaker growth. Thedeen, asked if it would be more realistic to model tariffs as a repeat threat, said that too would hit trade.
"If you listen to [what] Mr Trump says, and others, is that this is a kind of negotiating vehicle, right? And the uncertainty in my view would be ... for sure, not good for trade ... that would also, more and more lead to this kind of reshoring, or away from the globalisation. If you always had a threat of tariffs on China, you will .. be less inclined to invest and trade with China," he said in an interview.
"The long-term effect could be actually big.”
The Riksbank chose the simpler scenario of sustained tariffs because it was easier to describe the reaction of monetary policy, though it "may be ... less linked to reality," he said.
NEUTRAL RATE
The Riksbank published a new assessment of the neutral rate in the run up to its meeting, putting it in from 1.5-3.0%, and its new forecasts showed the policy rate settling at 2.25%, the range's mid-point. This week’s meeting saw a 25-basis-point cut to 2.5%.
Thedeen said, however, that the Riksbank did not set near-term policy to meet a precise neutral rate.
"I .. sometimes describe the neutral [rate] as a polar star. It's a direction ...you know vaguely where you're heading, but it's not a thing you use to navigate ...in the archipelago," he said.
"We don't know if it's 2.9 or if it's 1.6%," and going forward they would watch the data to see "how stimulative is it, or is it stimulative enough, or even too stimulative?"
The probability of going below 2.25% is similar to that of staying higher, Thedeen said, though market pricing suggests lower is more likely.
"We have [one] scenario ... going back to more the low inflation that we had, globalisation is not dead, very low activity. So the output gap is fairly wide. But we also have the fact that U.S. inflation is high, U.S. growth is higher. So that is, I think, working in the other direction. So I think it is balanced," Thedeen said.
KRONA WEAKNESS
The Riksbank has eased faster than most other advanced economy central banks, cutting its policy rate swiftly to around neutral, and Thedeen said this was because officials were convinced higher rates were hitting demand.
"It always a needs a little bit of a courage, actually, to do something before the larger economies but I think it was right," he said.
One concern was that easing faster would fuel krona weakness but Thedeen said interest rate differentials appear not to have played a major role this time around.
"The krona has not been super strong, I admit that. But … it's hard to see that this is linked to the interest rate differential ... Norway is a fairly good example. Norway has ... substantially higher rates than we have, and basically the same development versus the euro," he said.
Norges Bank at its December meeting again left its policy rate unchanged at 4.5%, as it has for a year.
"I think this is very much ... globally driven dollar strength. And hopefully, and that's our forecast, we will have a strong krona now, as the economy picks up," Thedeen said.
He downplayed the risk of heightened uncertainty continuing to hit the krona.
"Sweden is a triple-A economy. We have, I would say, one of the soundest frameworks for economic policy. We have a low government debt. We have higher productivity [than much of Europe] ...So fundamentals will point in the other direction. So I'm not buying this concept that we should always be kind of selling krona because it's risk-off," he said.
He also welcomed the improvement in liquidity in Swedish debt markets due to relatively rapid central bank asset sales as part of quantitative tightening, saying "We are very confident that this that was the right decision." (See MNI INTERVIEW: Linkers Poor Value Funding - Swedish Debt Head )