MNI STATE OF PLAY: Riksbank Hikes, Three More Likely This Year

The Riksbank said it was hiking its repo rate by 25 basis points from zero after its April meeting and published a rate path showing three more hikes are very likely this year and two more plausible in 2023 before its pace of tightening slows right down.

The collective path showed the policy rate at 1.81% at the end of the three year forecast period but in the accompanying Monetary Policy Report the central bank stated that inflation risks were to the upside and it sketched out an alternative scenario in which the rate rises to around 2.5%.

Most analysts had expected no change in the policy rate at the April meeting with the first hike coming instead in June but Riksbank Governor Stefan Ingves and colleagues including Martin Floden had already prepared public opinion and investors by forcefully making the case for tightening.

The rate path envisaged by the Riksbank showed a clear preference for front-loading tightening. On MNI calculations a 25-basis-point increase is fully priced in for the next meeting in June and then highly likely, with a 90% chance of a hike, in each of the two remaining meetings in September and November . The Riksbank stated that two or three more hikes were likely this year.

The Riksbank's central scenario shows the target inflation measure, CPIF, falling from an annual average of 5.5% in 2022, rather the 2.9% it had previously forecast. CPIF should ease to 3.3% in 2023 and hit the 2.0% target in 2024.

UPSIDE INFLATION RISKS

“The risk outlook for inflation is on the upside, however, particularly in the near term," the Riksbank said in its Monetary Policy Report.

In the alternative scenario "underlying inflation rises even further in the coming year" and policymakers have to respond, lifting the policy rate to about 2.5% instead of stopping below 2%.

The central scenario assumes inflation falls back in part because of weaker foreign demand and a gradual appreciation in the krona, boosted by interest rate differentials as the European Central Bank tightens policy more slowly.

The krona weakened markedly when Russia invaded Ukraine but rallied as Swedish inflation spiked and Riksbank policymakers made it clear they would tighten policy. In the MPR, on its trade-weighted KIK index, the krona was projected to rise, with the index moving from 117.8 this year to 116.8 in 2023 and 115.5 in 2024. A lower reading indicates appreciation.

The Riksbank envisaged low growth but no recession in the eurozone. Swedish GDP growth was revised down to 2.8% this year from 3.6% and to 1.4% from 2.0% for 2023.

The Riksbank is only using its balance sheet as a secondary tightening instrument, with the central bank announcing that it would halve the pace of asset purchases in the second half of the year so that, given their redemption profile, holdings would begin to decline before purchases end altogether.

Total nominal bond purchases in H2 are planned at SEK37 billion, comprised of SEK12 billion each of Swedish government bonds, municipal bonds and covered bonds, together with SEK1 billion of corporate bonds.