MNI: RIKSBANK PREVIEW: December Hike Expected But Some Doubts

--Riksbank Has Signalled 25bps Hike; But Activity Data Soft And Return To Zero A

Sideshow

By David Robinson

     LONDON (MNI) - The Riksbank is expected to raise its benchmark rate by 25

basis points to 0% at its meeting Thursday, in line with clear verbal guidance

from its October forecast round.

     While recent data have made a far from compelling case for tightening, no

members of the Riskbank's Executive Board other than Deputy Governor Per Jansson

have explicitly argued against the mooted hike and he could be the sole

dissenter.

     The Riksbank last raised its benchmark rate, by 25 basis points, in

December 2018, after saying that a hike was likely that month or in February.

This October, the Riksbank stated "the interest rate will most probably be

raised in December to zero percent."

     --Key pointers to the likely policy outturn are:

     --The Riksbank's previous collective rate forecast was for one hike and

done, with the policy rate flat-lining at zero.

     If the board does approve a hike, it is then hugely unlikely to signal any

policy reversal any time soon after and will instead leave the flat profile in

place.

     If it does not hike but were to push the anticipated rate hike back a

quarter or two, it would then face a tough battle to persuade market

participants it could be relied on to deliver in the future.

     --Some analysts have argued that the Riksbank board will take the Repo Rate

to zero in part because it wants to bring to an end the prolonged period of

negative interest rates. This logic, however, has been repeatedly challenged by

board members.

     The question of whether nominal and real interest rates faced by savers and

borrowers are negative is not dependent on whether the Riksbank sets the policy

rate at, just above or just below zero.

     Jansson noted in a recent speech during the almost three years that the

repo rate was at -0.5 per cent, normal bank deposit rates never turned negative.

He has also made the point that if the Riksbank set its repo rate too high it

risks giving the perception that it is not committed to get inflation back up to

zero.

     Board member Martin Floden said that while there was some merit in ending

negative rates "it can't be done in a way that jeopardizes confidence in the

inflation target."

     But First Deputy Governor Cecilia Skingsley told reporters that negative

effective rates would remain a fact of life, with some government bond rates

holding below zero.

     --The data have not bolstered the case for a hike. The Riksbank's own

business survey in November found that "the economy continues to slow down" and

that industrial companies' order flow had decelerated and that some were

reduction production and cutting costs.

     Price plans for the next 12 months, while a far from perfect indicator of

future inflation, declined sharply. Inflation has come in close to the

Riksbank's forecasts but it is still below the 2.0% target.

     --The Riksbank has admitted, in its own assessment of forecasts it made in

2017 and 2018, that while its projections were more accurate than external

forecasters for GDP growth, unemployment and underlying inflation "it has been

the least accurate for the repo rate."

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

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