MNI INTERVIEW:Riksbank's Skingsley Says Krona Fall Unjustified

--Skingsley Says Riksbank Forecast That Next Hike In H2 2019 Was Minor

Adjustment

--Predicted Timing Of Next Hike Could Be Brought Forward If Inflation Outlook

Worsens

--Skingsley Says Riksbank Cannot Completely Decouple Policy From ECB

By David Robinson

     STOCKHOLM (MNI) - The Riksbank's move to push back the timing of its likely

next rate rise cannot justify the krona's depreciation since late last year,

Executive Board member Cecilia Skingsley told MNI in an interview, adding that

the central bank could turn more hawkish again if inflation expectations pick

up.

     The krona has depreciated 5% against the euro and 6.7% versus the Norwegian

krone since Dec. 20, when the central bank as expected raised its policy rate by

25 basis points, to -0.25%, but also indicated it did not expect to hike again

before the second half of the year.

     "I find it surprising. It seems disconnected with our policy. I think we

have been quite clear on how our strategy works," Skingsley said in an exclusive

interview on Tuesday.

     The forecast shift could be reversed if the outlook for inflation turned

higher, she said, expressing confidence wage growth would pick up in an economy

suffering from skill shortages and lacking spare capacity.

     With inflation close to its 2.0% target and inflation expectations

anchored, the board has forecast progressive tightening and had projected an

increase, not a marked fall, in the currency.

     --"VERY MINOR POLICY ADJUSTMENT"

     "I appreciate this market view that when there is risk-off sentiment and

when macro data underperform the krona can get a bit hit. But I can still not

find it justifiable to see the kind of depreciation that we have seen basically

since the beginning of this year," Skingsley said.

     In December the board changed its collective forecast from a hike either in

that month or February to one that stated that the next rate rise will "probably

occur" during the second half of 2019.

     "We moved one rate hike ... six months into the future," Skingsley said.

"That is a strong (market) reaction to a very minor policy adjustment."

     "It is not really a policy adjustment. It is a forecast adjustment, that is

important to remember. That can be changed back if we see that the near-term

inflation numbers look bad in any way," she added.

     Skingsley described the board's current approach as wait-and-see, with no

rush to tighten but with the likely rate path sloping upwards.

     "We don't want to stay flat on rates for three years, that is not

appropriate ... with inflation on target and with very, very expansionary

policy," she said.

     "But we don't see an inflation outlook that is so bad in any way that we

are in a hurry to hike," she added.

     -WAGE GROWTH

     A link between unemployment and earnings growth, which has repeatedly

disappointed in recent years, is now re-emerging, she said, adding that an

increase in the labour market and low inflation expectations had previously

weighed on earnings growth

     "Now we are moving more into a space in the economy where the old school

theory starts to kick-in," with employees able to shift to higher-paying jobs,

inflation expectations anchored and international wage development more benign.

     The Riksbank's February Monetary Policy Report projected hourly wage growth

rising from 2.6% in 2018 to 2.8% in 2019 and 3.2% in 2020.

     "We are not an outlier in terms of our forecast for wages. It is a very

conservative forecast," she said.

     --EUROZONE RISKS

     While the domestic outlook for the Swedish economy appears fairly rosy, the

Riksbank cites external risks from Brexit, the eurozone slowdown and faltering

Chinese growth.

     "Given what we know about how the transmission channels work through the

economy it is definitely euro land that is always highest on my list of

worries," Skingsley said.

     Asked how far the Riksbank could go in decoupling from ECB policy, with the

latter rowing back on tightening, Skingsley said it depended where they were in

the business cycle.

     In 2015 when Swedish inflation was around zero and ECB was set to react to

the eurozone crisis by rolling out quantitative easing, the Riksbank had to

follow suit and carry out its own, smaller scale QE programme.

     "Then there was certainly no room to deviate. I think now there is more

room," she said but added that they were not prepared to test too hard just how

much Riksbank policy could diverge from the ECB's.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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