MNI STATE OF PLAY: Riksbank Cautious On QE Unwind, Rate Hikes

The Riksbank predicted on Thursday that its stock of assets would remain broadly unchanged this year and nudged forward the likely timing of its first rate hike to the first half of 2024 from the second, falling short of some analysts’ expectations for more aggressive projected tightening.

The Executive Board’s collective forecast after its February meeting showed the policy rate rising from zero to just 0.31% at the start of 2025. Some analysts had expected it might bring a hike forward to 2023, or trigger the start of balance-sheet shrinkage through non-reinvestment of maturing assets.

Financial regulator Finansinspektionen had also called on the Riksbank to swiftly unwind its holding of private sector assets, warning of possible distortions in market pricing.

But Riksbank Governor Stefan Ingves told reporters that it was wise for tightening to proceed cautiously, and noted the importance of the covered bond market in funding costs.

"Given our projections when it comes to the inflation rate then I just can't find a good reason for moving faster,” he said in response to a question by MNI as to why why he did not support early unwind of private sector holdings, “When you do these things, it should be handled and executed in such a way that ... it should be considered to be a non-event when it comes to the economic conditions of the country."

MILDER INFLATION OUTLOOK

In its Monetary Policy Report, the Riksbank noted that Swedish banks' long-term funding comes mostly from covered bonds.

The Riksbank said it will purchase SEK12 billion in both municipal bonds and covered bonds, and the same amount in government bonds, in the second quarter, with the SEK 37 billion total compensating for maturing assets. It envisaged reducing its stock of asset purchases only in 2023.

The Riksbank is facing a much milder inflation outlook than in the UK or the U.S., reducing pressure on it to act, particularly given the preceding decade of persistent price target undershoots.

MPR projections for the Riksbank's targeted CPIF consumer price index showed it peaking at 4.04% this month assuming a fixed interest rate, before falling back to just 1.15% in December and then staying under the 2.0% target until the start of 2024, and starting 2025 at 2.28%.

That profile, with the inflation overshoot further out, suggests a need for modest tightening ahead but it is not putting policymakers under any great pressure to act.

A raft of speeches in coming days and the full minutes of the board's February meeting will flesh out the divisions between the six members of the Riksbank board, with some members once again more sympathetic to early asset unwind. But for now Ingves' more cautious approach has the upper hand.