MNI Preview: Riksbank Seen Staying On Hold At Upcoming Meeting

By Kieran Williams

     LONDON (MNI) - The Riksbank is expected to leave all policy measures on

hold at its meeting on Thursday, keeping the repo rate at -0.50%. The Bank has

explicitly linked its monetary policy to other central banks, most notably the

European Central  which meet a few hours after the Riksbank on Thursday.

     At its previous meeting in September the Bank upgraded its 2017 growth

forecast by 1 percentage point to 3.2%, but kept Q3 growth forecasts unchanged

at 0.5%, suggesting it saw the 1.7% Q2 strength as transitory. Inflation has

been above the 2% target since July, printing 2.3% in August and September but

this was slightly lower than what the Riksbank expected and core inflation came

in at 1.9% in September against an expectation of 2.2%.

     The Riksbank has indicated in the past it is comfortable with inflation

being slightly above target and its policy has the support of the IMF despite

being widely criticised by those in the market. 

     The IMF said in September that "clearer signs that inflation is on a

sustained upward trend are needed before unwinding monetary accommodation."

     Though inflation expectations increased in September after dipping in the

summer, core price growth is expected to be subdued.

     Nordea analyst Torbjorn Isaksson wrote that "underlying inflation excluding

energy will not reach 2% again during this cycle. And if it doesn't happen

within the next few months, the likelihood decreases further, as imported

inflation will be lower next year."

     The Riksbank is wary of tightening monetary policy before the ECB acts for

fear that a sharp strengthening of the Krona could derail the Swedish economy.

The Krona is currently around 2% weaker than the Riksbank forecast which leaves

some room for manoeuvre, but with core inflation undershooting forecasts a

stronger Krona is still an issue for the Bank.

     Despite fears of mounting consumer debt and an overheating housing market

due to loose monetary policy Deputy Governor Martin Floden said in September

that "prices and wages are increasing only moderately, households are saving a

lot and we have a surplus on the current account," and that there were few signs

of overheating.

     Recent reports have indicated that house prices have actually fallen on a

sequential basis over the past two months, though they remain at elevated levels

in relative terms.

     Looking ahead, members of the Riksbank board Governor Stefan Ingves and

Deputy Kerstin af Jochnick have recently had their terms on the Riksbank board

extended, increasing the likelihood that policy will retain a dovish tilt in

future. 

     The Riksbank in April split 3-3 on its vote to extend quantitative easing,

with Ingves using his casting vote to back adding stimulus. Ingves and Jochnick

are both vocal proponents of QE which increases the probability of easy policy

for some time to come.

     In September one of the Riksbank Deputy Governors, Per Jansson, said it was

"more relevant to discuss a continuation of the asset purchase program next year

than to finish it or normalise it."

     Any QE extension is unlikely to be mooted at the October meeting. The fate

of the Riksbank QE programme is inextricably linked to the equivalent programme

at the ECB. Whilst it is widely expected that the ECB will announce tapering at

the upcoming meeting it is unclear what form this will take.

     Therefore, any decisions on the Riksbank QE programme will most likely wait

until December. Developments between now and December will be closely watched,

with inflation in particular driving the direction of policy.

--MNI London Bureau; +44 203 865 3809; email: kieran.williams@marketnews.com

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