MNI POLICY: Riksbank Minutes May Help Decipher Dovish Hike

--Riksbank Dec Minutes To Flesh Out Jansson Dissent; Logic Of Dovish Hike

By David Robinson

     LONDON (MNI) - Minutes of the Riksbank's December meeting due Jan. 9 could

provide more insight into the Executive Board's decision to press ahead with a

25-basis-point rate hike against a backdrop of financial market turbulence and

signs of shaky economic activity in Sweden's major export markets.

     Riksbank Deputy Governor Per Jansson opposed the decision, dissenting for

the first time in his seven years on the board. The impact of the hike was

cushioned by the bank's flatter projected rate path, showing that the next move

higher was unlikely until the second half of 2019.

     Jansson, who has attended 43 meetings since being appointed to the board in

2012, was until the December decision the only current member never to have

dissented from the majority view on either the policy rate or asset purchases.

     According to MNI's analytical framework, which splits members into

insiders, who have backgrounds primarily in state, regulatory or central bank

roles, and outsiders from academic or the private sector, he was a typical

insider, voting on the winning side alongside Governor Stefan Ingves and First

Deputy Governor Kerstin af Jochnick.

     The brief lines in the policy announcement justifying his dissent cited

uncertainty over whether stronger inflation would persist and his belief that it

was "better to await further information and proceed cautiously."

     In a speech on Dec. 4 entitled "Monetary policy in less favourable times"

Jansson set out succinctly his view that it would be self-defeating to hike in

order to have more ammunition to deal with a future economic downturn.

     He argued that tightening policy, unless in response to an anticipated

inflation overshoot, would lower the expected rate of inflation. This would

result in lower average nominal rates and "in future economic downturns the

distance between the repo rate and the lower bound may be smaller than before."

     --STORM CLOUDS

     His colleagues on the Riksbank board, however, have now tightened despite

signs economic storm clouds are gathering outside Sweden.

     Justifying the move, the Riksbank said inflation and inflation expectations

had become established around the 2% target, so the need for highly expansionary

monetary policy had decreased slightly. The repo rate rose from -0.5% to -0.25%.

     As the next move is not likely until the back half of this year and as

subsequent tightening was projected by the central bank to only proceed at a

pace of around a couple of 25 basis point hikes a year, the December decision

was widely described as a "dovish hike."

     Projections in the accompanying Monetary Policy Report showed that on this

gently rising rate path inflation would be 0.1 percentage point below the 2%

target on the CPIF measure in 2019 and 2020, and would hit it in 2021. That

forecast left the debate open over the need for near-term tightening and the

minutes should explain more fully why members felt justified tightening earlier.

     Having gone through a prolonged battle to get inflation close to target the

board warned of the risks of rapid krona appreciation - which in itself could

support cautious policy setting.

     Compared to a rapid krona depreciation "the risks linked to an unexpectedly

strong krona are judged to be more difficult to manage," the policy statement

said.

     The minutes will be published at 0830 GMT.

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

--MNI London Bureau; +44 203 865 3828; email: jai.lakhani@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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