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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
[TOPICS: MT$$$$,MX$$$$]

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