MNI PREVIEW: Riksbank Faces Near-Term Hike Forecast Dilemma

--Economic Activity Easing; Riksbank Has Been Wary Of Dropping Hike Forecast 

By David Robinson

     LONDON (MNI) - The Riksbank Executive Board will almost surely leave its

key policy rate on hold at -0.25% at its October meeting, with the focus ahead

of its announcement on Thursday on whether it will drop its guidance that the

next hike could come in December or early next year.

     Softer economic data support the case for the Riksbank to axe the guidance,

or at least push back the timing of another hike. Board members, however, have

expressed concerns about the impact of no longer forecasting tightening and it

is far from certain they will back down this time. Analysts are divided over the

outcome.

     The following are key elements facing the Riksbank board:

     --On MNI calculations, in its September collective rate path the Riksbank

board put a 10% probability on a 25-basis-point October hike, and implied a 70%

chance of a December hike and a 100% chance of one by February. The crux is

whether these odds will be altered sufficiently in the collective projection in

Thursday's Monetary Policy Report to justify altering the guidance.

     --Market expectations have tended to be more dovish than the Riksbank's

central projection. In the September minutes Deputy Governor Martin Floden

expressed concern that if policymakers pushed back the likely timing of the next

hike markets would assume that further tightening would never materialise.

     "Communicating that a rise will come a few months later than we had

previously planned would probably be interpreted as meaning that the policy rate

will remain at -0.25% for several years to come," he said.

     There is market speculation that the next move will be a cut, reinforcing

Floden's concerns.

     --The Swedish krona has been weak, recently hitting some of its lowest

levels since the financial crisis, and policymakers will be concerned about

driving it lower still if they drop their prediction of near-term tightening.

     "A further depreciation of the krona would lead to unnecessary volatility

and uncertainty over the development of the exchange rate and, ultimately, the

entire Swedish economy," Floden said at the September meeting.

     --Recent data have been soft, although things do not appear to be as bad as

implied by the eye-catching rise in the Labour Force Survey jobless rate.

Statistics Sweden has conceded that the data, which showed a spike in

joblessness to 7.6% in June before falling back to 7.1% in August and September,

were flawed. As MNI reported, the Riksbank has been wary of placing much weight

on the LFS numbers.

     --The Riksbank has already factored in weaker growth, cutting its central

growth forecast for 2019 to 1.5%, down 0.3 point from July, and to 1.5% in 2020

and 1.9% in 2021.

     Some subsequent data has been weaker still, with Sweden's Swedbank

Manufacturing PMI dropping to 51.8 in August and 46.3 in September,

contractionary territory, but the data could be erratic.

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

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