MNI STATE OF PLAY: Prices Put Focus On Riksbank Rates Forecast

Sweden's Riksbank will likely raise much of its inflation projection through to next summer in its monetary policy report on Thursday, due to base effects as the pandemic crisis eases, but could wait to get a better fix on whether price rises prove sticky before adjusting a projection for rates to stay unchanged at zero for the full three-year horizon.

The Riksbank could also provide some form of guidance to suggest that a change to the rates projection may soon be forthcoming, and some analysts expect this to occur in the November meeting, with an indication of a move from zero at the end of the three-year period. But some members of the central bank's board have argued that there is no rush to tighten after a prolonged period of inflation undershooting and the economic shock of Covid.

Inflation on the target CPIF measure, which measures consumer prices with a fixed interest rate, spiked to 2.4% on the year in August, above the Riksbank 2.0% goal and far outstripping the 1.4% forecast in the July MPR. The central bank's assumption that inflation would soften this summer and trough at 1.2% in July has proven to be unfounded.

COVID UNCERTAINTY

First Deputy Governor Cecilia Skingsley, in a speech late last month, acknowledged that the central bank had under-estimated the pace of recovery and the strength of inflation, but she stressed high uncertainty due to rising Covid cases around the world and questioned how far the underlying situation had really changed.

While activity and inflation have surprised on the upside, "inflationary pressures remain weak and the uncertainty surrounding the pandemic has essentially increased," said Skingsley, who has been among those board members arguing to leave stimulus in place.

Recently-reappointed board member Per Janssoon said in the July minutes that inflation dynamics did not point to less expansionary monetary policy and that he would "welcome further upward revisions to the longer-term forecast."

The view that previous inflation undershooting can justify overshooting, by strengthening the credibility of the inflation target -- an implicit form of average inflation targeting -- is clearly present on the board.