MNI STATE OF PLAY: End To Riksbank Zero-Rate Policy On Horizon

The Riksbank could signal an end to its zero-rate policy in its updated quarterly forecasts on Thursday, with the focus on whether the first hike is expected in the final quarter of the three-year projection or whether the central bank will revisit its earlier assumptions and bring forward tightening.

While the outcome of the meeting to be announced Nov. 25 will inevitably be for no change to the policy rate, it looks set to be significant as a policy turning point, both with regards to the projected timing of the first hike and to any indication of a new approach to its balance sheet.

The Swedish central bank's current collective rate path, published in September, showed the policy rate flatlining at zero for three years and, if it uses similar assumptions in its November projection, the first hike could appear in Q4 2024.

But, as other advanced economy central banks revise up their inflation profiles, the Riksbank could send a more hawkish signal by bringing forward the first projected hike.

CASE FOR HIKE

The September minutes revealed a debate over the case for including a hike in the forecast, although no member formally dissented from the flat rate projection.

While Deputy Governor Martin Floden said the repo rate may need to be raised in the second half of 2024, the dominant view was that after prolonged spells of undershooting the inflation target it would help to anchor expectations if the Riksbank demonstrated that it was equally willing to tolerate an overshoot.

The Riksbank is also under pressure to come up with a clear strategy for ending and then reversing quantitative easing, with Sweden's financial regulator this week calling for it to begin to phase out asset purchases to dampen incentives for risk taking.

BALANCE SHEET

Despite the accelerating recovery, the Riksbank is still completing its current round of asset purchases, with SEK68.5 billion set for the fourth quarter and total securities purchases set to hit SEK930 billion by end year.

The Riksbank's broad approach to quantitative tightening has been to carry on with full reinvestment of maturing assets until the policy rate has been hiked materially, but this strategy was set out before the pandemic.

In September, the Executive Board said holdings would remain more or less unchanged through 2022, but that with coming redemptions unevenly distributed it would gave itself leeway to vary the pace of purchases.

The Riksbank is expected Thursday to announce plans for purchases in Q1 2022. It could also come up with a broader reassessment of its approach to quantitative easing and tightening.

In September, Deputy Governor Henry Ohlsson sketched out an alternative approach to tightening saying that if the economy continued to improve, it might be appropriate to make monetary policy less expansionary. One possibility would be to allow holdings to decrease through ceasing reinvestments, he said.