MNI POLICY: Minutes Show Riksbank Concern Over Negative Rates

--Dec Minutes Show Executive Board Members Concerned Over Perception Negative

Rates Set In Stone

--Board Members All Saw Period Of Soft Growth Ahead; Divided On Tactics

By David Robinson

     LONDON (MNI) - Riksbank board members expect slower growth ahead and are

divided over the timing of monetary policy tightening, with two voting against

the Dec. 18 hike in the repo rate to zero percent from -0.25% while others were

concerned about the danger that negative rates could be perceived to be

permanent, minutes of the meeting published on Wednesday showed.

     Board members debated the costs of failing to meet market expectations

before deciding on the clearly-signalled hike, with some keen to leave the

negative territory first entered in February 2015.

     Following are key points from the minutes:

     --Some members placed weight on the view, expressed by Deputy Governor

Henry Ohlsson, that there could be detrimental effects if consumers and business

believed that negative rates were going to become permanent.

     Ohlsson said that a negative repo rate could lead to riskier behaviour by

households and that while some economists believe that only real interest rates

matter those who are "not economists believe it is strange that interest rates

can be negative. My conclusion is that it is a good idea not to have negative

interest rates unless it is quite necessary to have them."

     Others were more nuanced. Deputy Governor Cecilia Skingsley said that the

impact of cutting rates into negative territory had been largely the same as

cutting them and leaving them positive, suggesting that the effect was linear

and that there were no distortions below zero.

     She added, however, that it was reasonable to ask if the effects would be

the same if negative rates were seen as more permanent and if commercial bank

deposits turned negative.

     --Governor Stefan Ingves said that no-one had expected the repo rate to

remain negative for as long as it had.

     "The scope for repo-rate cuts and government bond purchases is not as great

as before, and should developments prove to be much more negative than in our

main scenario, we would probably need a different policy mix in Sweden," he

said.

     --Board members were all broadly supportive of the central projection that

the policy rate was set to remain at, or close, to zero throughout the

three-year forecast horizon.

     The minutes fleshed out the board view that the current outlook is that the

December hike was 'one and done'.

     --The two dissenting votes against the hike came from Deputy Governors Anna

Breman and Per Jansson.

     Jansson has previously set out in detail his view that as inflation is most

likely to spend much of the forecast period a little below target, the central

bank would risk undermining its commitment to inflation targeting by hiking.

     He wanted a repo rate path that showed a hike further down the line, when

the chances of attaining the inflation target had improved.

     The dissent by Breman, a newcomer to the board, was not based on any

radically differing assessment of the economic outlook but rather on monetary

policy tactics.

     She favoured delaying the first hike a little and then very gradually

tightening, unlike her colleagues who supported the one and done approach.

     Breman favoured "a repo-rate path that indicate an increase during the

first half of 2020, on condition that economic activity has stabilised then, and

that the repo rate is then raised around once per year in 2021 and 2022."

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

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