MNI REVIEW: Riksbank Leaves Policy, Rate Forecasts Unchanged

-Riksbank Sticks With Late 2019, Early 2020 Next Hike Timing

By David Robinson

     LONDON (MNI) - The Riksbank Executive Board left policy unchanged, as

expected, in results unveiled today from its July meeting, with the repo rate

left at -0.25%.

     Market focus was on the central bank's collective rate forecast and this

was left unchanged from the previous meeting, back in April, with the next hike

seen likely either late this year or early next year.

     The following are key points from the Riksbank announcement and quarterly

Monetary Policy Report (MPR) released today:

     -As the Riksbank did not change its rate forecast, the implied

probabilities of a hike at each meeting were unaltered.

     MNI estimated that there was 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 a

hike by February 2020.

     -The Riksbank's rate forecast, for gentle tightening, was maintained

despite mounting downside risks abroad.

     In the MPR, Riksbank economists said that Swedish economic activity was

expected to remain strong.

     The flipside of the downside risks from abroad was that there were

"expectations of more expansionary monetary policy from several central banks"

and this should help support demand. While international growth was expected to

ease, the Riksbank still forecast it to be close to its historical average of

just over 2 per cent a year.

     -Inflation was forecast to hold close to the 2% target, with past krona

depreciation and rising unit labour costs making it unlikely that there would be

any prolonged period with inflation running below the target level.

     The headline CPI measure was expected to dip in coming months and to then

rise and stay close to 2% for most of the forecast period.

     -The Riksbank revealed that it was looking to make technical changes to its

monetary policy framework and that these were expected to kick in from October.

     The changes are designed to try and keep the overnight rate close to the

policy rate.

     The central bank is planning to scrap its daily fine-tuning transactions

and to reduce the gap in interest rates between the standing lending and deposit

facilities.

     -The Riksbank, as trailed by MNI, published a detailed analysis of the

krona's weakness and looked at its forecasting methods. Governor Stefan Ingves

had highlighted his dissatisfaction with the forecasts, which had previously and

frequently projected krona appreciation when it reality it depreciated on its

effective index.

     Riksbank economists highlighted how various ways of estimating real

equilibrium exchange rates could produce divergent results, but they still

concluded that the currency was likely to head higher, saying that there was

plenty of evidence it was below its equilbrium rate. 

     They stressed, however, the uncertainty around exchange rate forecasting,

ensuring little weight will be placed on the projections.

     "It is very difficult to say just how large the krona appreciation can be

expected to be, when it will start and how quickly it will happen. The Riksbank

therefore intends to continue to contribute analyses that shed light on and

increase understanding of the krona's development," the MPR concluded.

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