MNI RIKSBANK WATCH: 75bps Hike As Rate Peak Nears

Sweden’s Riksbank delivered a widely-expected 75-basis-point hike on Thursday, lifting the policy rate to 2.5% after its November meeting but signalling that it was nearing the peak in this tightening cycle.

The Monetary Policy Report’s projection showed the policy rate hitting a peak of 2.84% by the third quarter of next year, with the board stating that the next hike was likely to come early next year, suggesting an increase of at least 25bps at the February meeting. At that point there would only be 25bps more to come.

The Riksbank, which raised rates by 100bps in September, has front-loaded tightening to push back against inflation expectations as core price increases outpaced previous projections.

"The risk that the current high inflation will become entrenched is still substantial, and it is very important that monetary policy acts to ensure inflation falls back and stabilises around the target of 2% within a reasonable time," the board stated.

RECESSION

The MPR indicated that on the central bank's anticipated rate path inflation would fall below the 2% target in two years' time. The target CPIF measure was projected to ease from 7.6% this calendar year to 5.7% next, a revision up from the previous forecast of 5.1%, and then down to 1.5% in 2024, slightly lower than 1.6% seen last time.

The economy was shown contracting in 2023, with output declining by 1.0% before rising by 1.0% in 2024. Unemployment was shown rising to 7.9% next year and to 8.3% in 2024, just 0.1 point higher than previously forecast.

ASSET PURCHASES TO CEASE

The Riksbank also restated its approach to unwinding quantitative easing, with its purchases of relatively short-dated debt instruments leading to fairly rapid balance sheet shrinkage.

Securities acquired for monetary policy reasons totaled SEK860 billion by mid-November with the Riksbank stating that purchases will end at the end of 2022 and then debt will be allowed to mature without replacement. It projected that holdings would decline by almost SEK490 billion, more than halving total stock, by the end of 2025. A big chunk of these maturities, some SEK 290 billion, are in covered bonds, which have shorter maturities than government bonds.