MNI PREVIEW: Riksbank Steady, Q1 Hike May No Longer Be Assured

-Riksbank Seen Lowering Rate Profile: Formerly Near Certain Q1 Hike May Be More

Doubtful

By David Robinson

     LONDON (MNI) - The Riksbank is almost certain to leave policy unchanged at

its September meeting, with the focus on whether it lowers the likelihood of

tightening in coming quarters, as a previously-near-certain hike by Q1 2020 is

called into question.

     The executive board's September announcement, on Thursday, will be

accompanied by a fresh set of quarterly economic projections and a new

collective rate path. MNI estimated that its previous, July, forecast put a

0-10% chance of a 25 basis point hike in September, a 30% chance of one by the

October meeting and a 90-100% chance of one by February 2020 but trade tensions

have intensified and the outlook darkened.

     The Riksbank looks likely to lower the likelihood of another rate hike in

2019 and to introduce a significant probability that there may be no increase in

the first quarter of next year. The persistent softness of the krona, down 5.8%

since the start of the year and 0.8% on the month on its trade-weighted index,

argues against the central bank removing tightening entirely.

     The Riksbank board's summary of its July forecast was that the repo rate,

currently at -0.25%, "will be increased again towards the end of the year or at

the beginning of next year."

     The tide is flowing against advanced economy central banks expressing such

a high degree of confidence that tightening is around the corner. The Riksbank's

neighbouring Norges Bank last month softened its line that policy would most

likely be tightened further in the course of this year, stating that "the global

risk outlook entails greater uncertainty about policy rates going forward."

     The Riksbank could add a similar rider to its guidance on Thursday as well

as flattening its rate path.

     In its July economic summary Riksbank board members said that uncertainty

had increased, that financial markets appeared to anticipate worse was ahead and

that the deterioration in international activity could weigh on the economy.

     Deputy Governor Per Jansson, in the July minutes, noted that while the

downside risks from the international economy were very difficult to quantify

and have largely been left out of the central projection "there is now

nevertheless a fairly clear tendency for some of these risks to gradually

migrate into the main scenario."

     The September forecasts are likely to see this trend continuing, with rate

expectations around the world declining and U.S.-China trade tensions, and

Brexit risks, ratcheting up again.

     The inflation outlook in Sweden does not present any compelling case for

tightening, although the weak headline rate reflects lower energy prices and

ex-energy prices have held up better.

     The target inflation rate, CPIF, fell to just 1.5% in July, 0.5 percentage

point below the Riksbank's goal, and although the central bank back in July

forecast a rise to an annual average of 1.8% in 2020 and 1.9% in 2021 the

inflation outlook places it under no clear pressure to press ahead with

tightening.

     Instead, the central bank faces a battle to ensure inflation expectations,

which have dipped below target, do not decline further.

     Minutes of the July meeting are likely to show some divisions among board

members and it would be surprising if any of the members argued strongly in

favour of tightening, with the most hawkish member of the committee, Henry

Ohlsson, previously only going so far as to say that a rate rise "as early as at

the September or the October meeting is for me an open question."

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

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