MNI PREVIEW: Riksbank On Hold; Doves Likely To Join Majority

By David Robinson

     LONDON (MNI) - The Riksbank is set to leave its repo rate on hold at 0.0%

at its February meeting and publish a collective rate projection showing the

rate flat-lining through to the first quarter of 2022, with a 25-basis-point

hike not even fully priced in by the end of the three-year forecast period.

     Following are key points to watch for from the Riksbank's policy decision

and quarterly Monetary Policy Report, both due on Wednesday:

     --The December Monetary Policy Report projected that the repo rate would

hold at 0.00% until the second quarter of 2022, when it edges up to 0.03%, after

which it rises to 0.13% in the fourth quarter of that year. A similar near flat

rate profile is likely in the February report.

     In December 2019, the Riksbank's central projection was for the repo rate

to rise from -0.25% to 1.0% by the end of 2021 but when it finally hiked in

December 2019, it produced a near flat rate path, only leaving the door just

ajar to one more increase in the latter half of its forecast horizon.

     "Four of the five increases forecast for the coming years have .. been

removed from the repo rate path, and my assessment is that only one increase is

possible, given the current economic outlook and inflation prospects. The fact

that the policy rate is forecast to lie still after today's meeting means we

will enter a wait-and-see situation," Riksbank Deputy Governor Cecilia Skingsley

said in the minutes of the December meeting.

     --Two board members, Anna Breman and Per Jansson, dissented from the

December decision, preferring to leave the repo rate unchanged at -0.25% but

both could vote to leave it unchanged in January.

     Breman's dissent was over timing rather than any opposition to tightening.

Her preferred rate path was steeper than the collective one.

     "I would prefer a repo rate path that indicates an increase during the

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

that the repo rate path then indicates around one rise per year in 2021 and

2022," she said.

     Jansson was unpersuaded of the case for near-term tightening, with

inflation struggling to get to target and downside risks evident.

     "I prefer a repo rate that is unchanged at -0.25% and a path for the repo

rate where the next increase occurs some way into the forecast period," he said.

     If he focusses solely on the desired level, he could justify a cut but he

also opposed the 25-basis-point hike in December 2018, which took the repo rate

to -0.25%, and then proceeded to vote for unchanged policy in the following

months rather than seeking to reverse the hike.

     --The most likely outturn is a unanimous vote in favour or unchanged

policy.

     If there is any slight modification to the policy stance, it could come

through acknowledgement that the external environment has improved, with some

diminution of trade tensions, and a marginal shift upwards in the implied

probability of a hike in the forecast horizon.

     --Economic data since December has yet to throw up major surprises.

     In November CPIF inflation rose to 1.7% and stayed there in December, but

the Riksbank may take the view that it is too early to row back on its

assumption that inflation will increase over the coming months. Similarly,

activity data is compatible with a deceleration in growth but is not clearly

pointing to any sudden halt.

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

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