MNI INTERVIEW: Riksbank Policy Must Stay Restrictive - Thedeen

The Riksbank's policy rate will need to stay in restrictive territory for a good while yet, Governor Erik Thedeen told MNI, even as the Board's collective policy path published Wednesday shows rates heading lower in the latter stages of the current forecast period.

The collective rate path, published alongside the April decision to raise rates by 50 bps to 3.5%, showed the benchmark rate rising to 3.65%, with the board stating another 25 bps hike was likely in June or September. The rate was then shown holding at that level deep into 2025, before falling back to 3.35% three years ahead. February's forecast had it holding at a 3.33% peak through to end forecast.

"I wouldn't over exaggerate the messaging here. I think the broad message is the same. We should go up and we should stay there. But, of course, if our forecast is fulfilled then we would have had stable 2% inflation for a while and then, of course, it is natural to cut rates," Thedeen told MNI in an exclusive interview.

"The most important story is that we should be on a restrictive level for some time to be sure that we are actually anchoring inflation," he added.

CORE INFLATION KEY

Looking at domestic inflation, Thedeen said he currently placed more weight on core prices, which has proven more resilient than the target headline measure, adding that the central bank's had to get inflation back to target in order not to undermine recent wage negotiations. However, he acknowledged policymakers looked at a range of measures, although they currently point in a similar direction.

"(Data) basically paint the same picture that they have moved up fairly dramatically, they have kind of levelled off and I think that is the picture that we also see if you look on the ex-energy component ... it is fair to say that we look a lot at that (ex-energy) number now," he said, noting it was reasonable to have more weight on the ex-energy CPI.

PAY DEAL

The central bank head, who took up the role in January, welcomed the benchmark two-year pay deal struck by the manufacturing sector unions, as it eases fears of a wage-price spiral and he said it was one factor in the board decision to go a bit easier on tightening.

" This was for sure a factor that weighed into our decision ... that we will go a little bit slower in the future," he said, although he accepted the deal put the onus on policymakers hitting the 2% price target as the deal was based around that.

"If we don't deliver then it will be a totally new discussion in the wage setting bargaining," Thedeen said, noting that all parties agreed on the need to hit target.

On 31 March, the manufacturing sector signed agreements that apply for two years and entail wage increases of 4.1% in the first year and 3.3% in the second year, the Riksbank noted in their MPR.

QT PLAN

Thedeen said bond sales in the quantitative tightening programme appeared to be helping liquidity in Swedish debt markets and that for now they would continue on the current monthly sales path.

"There are so many factors that have an impact on liquidity in the bond markets but for sure if we get a little bit more supply of risk free assets into the marketplace ...(as) the central bank bought up quite a lot of the supply I think this could help a little bit. But this is a long-term process, we need to have the players into the market who are prepared to take risk and so on," he concluded.