MNI STATE OF PLAY: Riksbank Hikes 100bps, Sees Peak At 2.5%

The Riksbank raised its policy rate by 100 basis points to 1.75% at its September meeting, more than anticipated by most analysts, but its projection for further tightening of only 75 basis points left this cycle’s rate peak roughly where expected, sending the Swedish krona down after an initial strengthening.

Analysts had largely anticipated a 75bp hike in September, followed by another 75bps in November. The Riksbank’s new collective rate projection, however, which shows the policy rate at 2.35% by January 2023 and peaking at 2.52% in April, would now be more compatible with 50bps in November, followed by a final 25ps in February.

The Riksbank expects its policy rate to then drift lower in the second and third years of its rate forecast.

In its policy statement, the Riksbank’s Executive Board said front-loading of hikes was required to avoid self-reinforcing rises in inflation expectations and inflation itself.

"If inflation is allowed to remain high over a long period of time, there is a significant risk that more and more actors will expect higher price and cost increases going forward and will try to compensate themselves for these. Such behaviour can rapidly become self-reinforcing," it said.

EXTREME UNCERTAINTY

Its detailed forecasts highlighted extreme uncertainty around policy setting at present, with the 90% uncertainty band showed the benchmark rate anywhere between 6% and negative by the end of the three-year forecast.

The MPR cited the war in Ukraine, questions over the substitution of Russian energy supplies and " how economies are affected when central banks raise their policy rates a lot and quickly" as key factors behind the heightened uncertainty.

While the Riksbank has set the pace for other central banks meeting this week with a 100bps hike, its projected policy rate of 2.5% by year-end still puts it below those of other advanced economy central banks, with the exception of the European Central Bank, based on market rate expectations.

The Riskbank raised its forecasts for the target inflation measure, CPIF, which was shown peaking at 7.75% in December before easing to 2.72% at the end of 2023 before hitting the 2.0% target by the end of 2024. The annual average for CPIF for 2023 was forecast at 5.1%, up from 4.2% in the previous Monetary Policy Report.

The Riksbank expects Sweden’s economy to slow markedly next year. It cut its 2023 GDP growth projection to -0.7% from 0.7%, or to -0.5% from 1.0% in calendar-adjusted terms.