MNI RIKSBANK WATCH: Focus On Rate Peak

Sweden’s Riksbank is widely expected to raise its key interest rate by 50 basis points to 3.0%, just above the level it has previously indicated could constitute the peak of the tightening cycle, focusing attention on whether the central bank will signal that more hikes are likely amid continuing inflationary pressures and a weak krona.

Possibilities for the Riksbank including pointing to one or perhaps two more 25bp hikes in its projection, pushing the likely rates peak towards 3.25% or 3.5%, or switching to a "wait-and-see" approach, under which any further tightening would be data dependent.

With the European Central Bank preparing to increase rates further, Riksbank Executive Board members will be concerned about adding to the downward pressure on the currency and fuelling import inflation by announcing an early rate peak. The krona has depreciated 3.6% over the past three months on the central bank’s KIX index.

The Riksbank hiked by 75bps in November and projections in that month's Monetary Policy Report showed the policy rate peaking at 2.84% this year, with most of that tightening in the first quarter. The rate was then shown flatlining just below 3% from the middle of 2024 throughout the remainder of the three-year forecast, which was sufficient to return inflation to close to target by the end of 2023.

CURRENCY WEAKNESS UNHELPFUL

If policymakers do opt to leave the door open to further near-term tightening they could raise the rate peak while also showing some cuts in the latter stages of the forecast.

First Deputy Governor Anna Breman set out the case for hiking in a speech on Jan 20. While acknowledging signs of easing global price pressures, she observed that labour market data and especially headline inflation have been stronger than the Riksbank expected in November. The weak krona was also unhelpful at current levels of inflation, she said.

But she gave no indication of how policy would be formulated after the February meeting, which will be the first under new Governor Erik Thedeen.

Thedeen’s background as Sweden’s top financial regulator will make him acutely aware of any cracks in the system that could be widened by rate hikes. He warned lawmakers at the end of January that vulnerabilities included highly leveraged commercial property companies and household indebtedness at a time of double-digit declines in house prices from peak.

But Riksbank policymakers have stressed that their focus is firmly on getting inflation back under control and not to allow vulnerabilities in the housing market or elsewhere to sway rate setting.