MNI RIKSBANK WATCH: 25bps Hike, Krona Poses Upside Risks
The Riksbank is set to hike by 25bps hike, and could release a scenario with more tightening.
Sweden’s central bank looks set to hike by 25 basis points to 4% on Thursday and could signal a lower probability of one more increase before it concludes the tightening cycle and holds the policy rate near flat for an extended period.
Policymakers are also likely to make clear on Thursday, probably through an alternative rate scenario, that they stand ready to tighten further if krona weakness continues and service sector inflation proves sticky.
The Riksbank’s June Monetary Policy Report’s central projection showed the policy rate peaking at just over 4.0% while the market rate path has been a little higher, placing a roughly equal chance on another 25 bps hike after September. It would be no surprise if the central bank’s new central forecasts again left the door ajar to one more hike with the policy rate then shown flat-for-long.
The Swedish central bank has faced a tricky mix of sticky service sector inflation, a weak currency and weaker-than-anticipated growth.
Deputy Governor Martin Floden said in a speech on Aug 28 that while headline inflation has been falling and their forecasts looked likely to be revised lower, krona weakness remained a concern while service sector inflation, a key metric for the central bank, remained too high.
The most recent data on Sept 14 showed headline CPI fell to 7.5% in August from 9.3% in July primarily due to energy effects, while on the target CPIF measure (CPI with a fixed interest rate) inflation was up 4.7% on the year with service sector inflation stabilising. Governor Erik Thedeen told MNI after the June hike that the Riksbank was focused on underlying inflation. (See MNI INTERVIEW: Risbank Only Needs Gradual Hikes – Gov. Thedeen)
WEAK KRONA SCENARIO
The Riksbank could also again set out an alternative scenario in which a weak krona feeds through to a higher policy rate.
The krona’s trade-weighted index, the KIX, has been running between 3% and 4% softer than assumed by the Riksbank in June, when its weak krona alternative scenario saw the policy rate ending up 0.5 percentage point higher than in the central case.
Policymakers will have to decide how far to go in incorporating risks of a weaker krona into the central projection or whether to again leave them in the alternative scenario while acknowledging the possibility that the economy could be shifting to that alternative path.
The June forecasts already had the economy contracting in 2023, by 0.5%, and flat in 2024 before growing 1.8% in 2025 and a further downward revision will raise concerns over the depth of any recession. CPIF was shown at 2.4% in 2024 and only returning below target in 2025. A softer krona scenario and persistent services inflation would resurrect the chance of higher rates even if the central forecast shows rates plateauing.