MNI PREVIEW: Riksbank Policy Steady; Krona Forecast In Focus

-Riksbank To Leave Policy Unchanged; Distance Itself From Forecast Of Stronger

Krona

-Riksbank Board Could Push Chance of 2019 Hike Further Out 

By David Robinson

     LONDON (MNI) - Market eyes will be focussed on this week's Riksbank meeting

on any further delay in the likely timing of the next rate hike in the Executive

Board's collective projection, together with a potential rethink of the Swedish

central bank's patchy record on forecasting krona levels.

     The Riksbank board, which looks sure to leave policy unchanged on

Wednesday, will be making its first policy decision since European Central Bank

President Mario Draghi said last month that the ECB could ease policy further.

It would be a huge surprise if the 6-person Riksbank board collectively

signalled any intention to ease but members are divided with one having already

left the door ajar to easing.

     Deputy Governor Per Jansson warned at the last Monetary Policy Meeting in

April that there could not be substantial new downward revisions to the

inflation forecast "without this also leading to further adjustments of monetary

policy."

     In April, the board left the repo rate unchanged at -0.25 per cent and the

collective rate path showed the most likely date for the next rate hike pushed

back to late 2019 or early 2020. The June meeting may well see the probability

attached to a hike later this year nudged a little lower, with the repo rate

held steady.

     The board looks certain to divide again over the detailed outlook for

policy and it will be interesting to gauge just how much Jansson remains an

outlier.

     The Riksbank will also publish on Wednesday its latest Monetary Policy

Report showing updated quarterly forecasts, including a projected rate path.

While this quarterly snapshot is out of sync with the six-times-a-year Riksbank

board policy meetings (reduced to five from next year), MNI calculated that the

April report put a 90-100% probability on a hike by February 2020, with a 30%

chance on one by six months later.

     --Krona Forecast Woes

     A stumbling block for the Riksbank board has been the central bank's

currency projections. The krona has experienced a prolonged depreciation but in

April it once again forecast an appreciation ahead.

     Riksbank Governor Stefan Ingves has been critical of the central bank's

repeated prediction that the krona will appreciate and this time around the

board looks likely to distance itself from that forecast. An apparently weary

Ingves said in the minutes from the April board meeting that: "Just as many,

many times before, we now assume that the exchange rate will gradually

strengthen", adding that they kept justifying this bullishness on the currency

by reference to the strength of the Swedish economy and the current account

surplus.

     Ingves went on to ask whether it was "not time for a rethink when it comes

to the analysis of the exchange rate."

     Once again the appreciation has not materialized with the krona on its

effective KIX index falling 1.0% since the start of April, moving from 120.24 to

121.45, with the higher reading showing the currency weakening.

     One possibility for the board would be to highlight the uncertainty around

the exchange rate projection and downplay its significance for policy. An

alternative would be to move into line with some other central banks, including

the ECB, by simply assuming that the currency will move sideways.

     --Academic Shortfall

     "In the academic literature, people have struggled to find a better

prediction than the prediction of no change. There frequently are papers that

claim to have some model that is successful, but those models never hold up

outside the data that was used in the paper," Charles Engel, a US based academic

well known for his work on exchange rate movements, told MNI.

     The Riksbank has placed weight on real equilibrium exchange rates but with

Ingves saying that krona movements appear to be dictated by other factors, it

will be tempting for the board to stress that it is not placing much weight on

such projections.

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