MNI RIKSBANK WATCH: Rates Seen On Hold, QT Pace Stepped Up
The Riksbank looks sure to leave its policy rate on hold at 4.0%, while faster quantitative tightening is widely expected.
Sweden’s central bank is set to leave its policy rate on hold at 4.0% this week, with policymakers having said that further rate hikes are not likely but that they will use their first meeting of 2024 to consider whether to step up the pace of quantitative tightening.
The Riksbank could do anything from leaving its bond sales at the current roughly SEK5 billion a month or speed up QT to as much as a monthly SEK8 billion, according to analysts' forecasts. But it will aim for a pace that allows the bonds to be readily absorbed by markets and does not result in any sharp rise in market rates, with Governor Erik Thedeen having highlighted the distortions large-scale asset purchases created in Sweden's relatively thin debt markets before joining the central bank, following which he was quick to initiate sales.
QT BOOSTS KRONA
Thedeen has also noted how at the margins QT is supportive of the krona, as outside investors purchase bonds, and with the currency having stayed under pressure this may add to the appeal of faster QT.
Another issue that Thedeen is likely to face in his media appearances following the policy announcement is the need for the RIksbank to capitalise as a result of QE losses, with its latest estimate being that it will require an injection of around SEK40 billion. Questions remain over the timing and the structuring of debt issuance to pay for it and the sustainability of the Riksbank's funding model. (See MNI INTERVIEW:Sweden Likely To Borrow To Cover Riksbank Losses)
This meeting, which ends in a Feb 1 policy announcement, will not be accompanied by fresh economic forecasts but rather a relatively short update on economic developments, with the latest data showing inflation on the target CPIF measure still well above the 2.0% target, at 5.3% ex-energy, but below the central bank's most recent forecast.