MNI RIKSBANK WATCH: Under Pressure To Do More Than Hike 25BP

Most analysts expect the Riksbank do no more than hike its policy rate by 25 basis points at its June meeting this week, but krona weakness and sticky core inflation have prompted markets to partially price in 50bp.

In April, Sweden’s central bank hiked 50bp to 3.5% and said it would likely increase the policy rate by 25bp in June or September. But the target CPIF (CPI with a fixed interest rate) inflation rate was 6.7% in May and CPIF ex-energy only dipped to 8.2% from 8.4% in April, while the krona, which the central bank expected to gradually appreciate, has instead depreciated 3.2% since publication of the April Monetary Policy Report.

If the Executive Board wants to do more than just hike 25bp, it could raise its projected rate peak to 4.0% or above, pointing to another 25bp in September. It could also publish an alternative higher inflation scenario compatible with further rate rises. Its third option would be to hike by 50 this week.

BOARD DIVISIONS

The minutes of the previous policy setting meeting in April showed that the five-member board was divided over tightening tactics and agreement in June looks highly unlikely.

Two members, First Deputy Governor Anna Breman and Martin Floden, had backed hike of only 25bp, though accompanied by a path showing a higher chance of further increases in June or September.

Breman has highlighted the risks of a central bank being seen to be highly data-dependent, arguing that policy should be seen to be forward looking. From her perspective there would be a cost to reinforcing a perception that policy was being buffeted by the latest inflation print.

Nevertheless, in an MNI Interview following the April hike Governor Erik Thedeen said he currently placed more weight on core inflation, which is proving sticky, and emphasised the importance of keeping rates at a restrictive level for some time. (See MNI INTERVIEW: Riksbank Policy Must Stay Restrictive - Thedeen)

For the trade-intensive Swedish economy, currency depreciation will add to pipeline inflation pressures, and a hike of only 25bp could trigger further weakness.