MNI INTERVIEW: Riksbank's Bunge Sees Less Krona Pass-Through
MNI (LONDON) - The pass-through from movements in Sweden’s exchange rate to inflation may be more subdued now than during previous episodes when inflation was high and volatile, Riksbank Deputy Governor Aino Bunge told MNI, which suggests that shifts in the krona's value may now matter less for monetary policy setting.
Bunge is looking at surveys as well as hard data to understand how previous rate cuts fed through to changes in prices, she said in an interview after a speech at a JP Morgan event. She also downplayed the importance of the Riksbank’s assessment of the neutral rate for short-term policy setting.
During periods of high and volatile inflation, the pass-through from krona weakening was "stronger than we had expected in our models ... in times of high and volatile inflation it is likely that companies' pricing behaviour is different and that you can see stronger effect," Bunge said.
"Now inflation is moving back to target, we're not in the same environment. So perhaps we're not seeing as much of a pass- through from the krona exchange rate. But that's something to really keep an eye on.”
Earlier in its easing cycle last year, the Riksbank had acknowledged that it was weighing the effect of its policy decisions on the krona. (See MNI INTERVIEW: Krona A Factor In Riksbank Cut Timing - Thedeen)
While she said the krona is undervalued on fundamentals, the outlook for the currency near-term is more uncertain. The krona has lost about 8% against the dollar since October, in line with a broad rally in the greenback accompanying the arrival of Donald Trump to the White House, though it is little changed against the euro.
"It's clear that for short term movements now ... the dollar has been driving during the winter. But ... I think there are good fundamentals in terms of the Swedish economy, good fiscal position, etc. So if we see … less uncertainty, I hope there's a case of a strengthening of the krona," she said.
The Riksbank's Executive Board cut its policy rate by 0.25 percentage points to 2.25% in January, completing 175 basis points of cuts since May, and signalled that this may be the end of the easing cycle, with Bunge saying at the event that she was in line with her colleagues and that "it was a pretty balanced approach." (See MNI INTERVIEW: Riksbank Head Sees Turbo-Charged Policy Biting)
INTO NEUTRAL RANGE
The cut took the policy rate lower into the range for the long-term neutral rate of interest of 1.5% to 3% identified by the Riksbank when it published a reassessment of the metric in November. The updated estimate was one percentage point lower than the range published in 2017.
Bunge said it was better to think of neutral as a long-term policy anchor than as a determinant of policy in the here and now.
"It's definitely something like an anchor ... forward looking," which weighs on longer-term rate expectations "further down the road rather than driving monetary policy," she said.
Bunge rejected the suggestion that, as the Riksbank’s policy rate has reached a point well within its range of estimates of neutral, it should wait for hard data before taking further policy action, rather than using less reliable but quicker survey data to form its decisions.
"I would say look at both, because we need to see how actually consumers are now reacting to lower interest rates," she said.
Back in 2021 and 2022, "because all of the forecasts had gone wrong ... [policymakers were] very much focused on the latest inflation number to see where were things actually moving," Bunge said. Now things are "back to more normal,” though this does not mean ignoring the latest data and survey evidence.