MNI RIKSBANK WATCH: Hikes 25bp, Door Open To Further Rise

The Riksbank raised its policy rate by 25 basis points to 4% at its September meeting and signalled both a significant chance of one more hike and that the policy rate is likely to stay at high levels for some time.

In its Monetary Policy Report the Swedish central bank raised its projections for the peak in the policy rate to 4.10% from 4.05% and showed it remaining there throughout 2024 and into the first quarter of 2025 before easing to 3.69% three years ahead. Riksbank Governor Erik Thedeen told a press conference there was a relatively high chance rates would need to rise further and that policy would have to be tight for a relatively long period of time.

The Riksbank head said the policy stance was "data dependent", but also highlighted uncertainty over how quickly inflation would fall and indicated that interest rates were likely to follow a “Table Mountain” pattern, plateauing at a high level, rather than falling swiftly following their rise.

Alternative scenarios in the MPR illustrated uncertainty surrounding this central rates projection, while reinforcing the message that the Riksbank would opt to move fast if there is another upside inflation shock.

One showed rates rising quickly in response to higher-than-expected inflation while another charted a more delayed response in which the Riksbank only acted to avoid high inflation becoming entrenched. Earlier hikes saw the policy rate projected to peak at 4.8% whereas a belated reaction would see it hitting 5.2% and staying there.

Conversely, if inflation surprises to the downside, the MPR set out reasons why policymakers might wait before easing policy, implying little likelihood of rate cuts in the near future.

KRONA WEAKNESS

The MPR highlighted the weakness of the krona, which it termed "unjustifiable", warning that it could contribute to derailing the return of inflation to around target. The Bank's central projection once again assumed modest krona appreciation, but if the currency fails to strengthen it would put upward pressure on monetary policy, particularly given the trade-intensive nature of the Swedish economy.

Since the start of 2022, the krona has depreciated by just over 13% on the trade-weighted KIX index. The Riksbank said there was evidence that in times of higher uncertainty currency weakness had a greater impact on inflation and that its own business survey found goods sector firms citing the weak krona as an important factor behind planned price rises.

In the central projection for the target CPIF price measure, CPI with a fixed interest rate, inflation was shown gradually returning to the 2% goal, dropping to 2.5% in 2024 and 1.8% in 2025.