MNI Policy: Riksbank Minutes Highlight Board's Divisions

-Executive  Riksbank Board Split With Krona, Underlying Inflation Weak

By David Robinson

     LONDON (MNI) - Minutes of the Sept. 5 Riksbank Executive Board meeting

highlighted the fragmentation of members' views as they wrestled with firm

headline inflation, soft core inflation and krona weakness.

     -The Executive Board left the repo rate unchanged at -0.50 per cent, with

its collective forecast indicating a hike in December or February, rather than

in October or December as indicated in the previous quarterly forecast

     Two members, Deputy Governors Henry Ohlsson and Martin Floden, entered

dissents in favour of earlier tightening and the minutes showed Deputy Governor

Cecilia Skingsley was the floating voter.

     Skingsley wanted to leave an October hike on the table, but did not feel

strongly enough to enter a dissent. The other three members of the-six strong

board were comfortable removing an autumn hike.

     -The Riksbank has repeatedly overestimated the strength of the krona and

Skingsley and Governor Stefan Ingves took the view they needed to look again at

the key exchange rate drivers. The central bank's exchange rate forecasts attach

weight to relative growth but despite strong domestic growth, the krona has been

hit.

     With financial and geopolitical unease likely to stay elevated, the

Riksbank board may well reconcile itself to a more prolonged period of krona

weakness.

     Ingves said: " If we look back at our krona forecasts, we can see that the

Swedish exchange rate movement has been difficult to predict."

     While the Riksbank has focused on growth differentials and current account

balances, "we have seen that minor currencies, such as the Swedish krona, often

depreciate in times of financial and geopolitical unease."

     Skingsley said: "The themes currently weakening the krona exchange rate,

including international downside risks and weak Swedish inflationary pressures,

will dominate the krona exchange rate for a while longer."

     -The minutes removed any real likelihood of a hike before December while

stressing the board is keen to deliver one either at the end of this year or

early next.

     "It will soon be time to raise the interest rate, according to the

forecast, in December or February. Given the fairly long period of negative

interest rates we have had, I also think that it is a good idea for us to

indicate, in an orderly fashion, where we are heading," Ingves said.

     -The minutes make clear the Riksbank will hike in 25-basis-point increments

or not at all, with the board agreeing to a line in favour of quarter point

moves.

     "It is ... worth mentioning in particular the 0.25 percentage point step.

Smaller steps have no major economic relevance," Ingves said.

     -The lingering doubt for policymakers keen to tighten policy is that core

inflation could continue to weaken, with services inflation in particular

undershooting expectation.

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