MNI STATE OF PLAY: Riksbank May Axe Its FX Intervention Regime

--Main Policy Rate Seen On Hold Following July Meeting

By David Robinson

     LONDON (MNI) - The Riksbank Executive Board's July meeting looks set to see

at least one dissenting vote for a rate hike. Moreover, the board may well axe

its mandate allowing for instant intervention in foreign exchange markets.

     With economic activity strong and inflation around target, Deputy Governor

Henry Ohlsson is expected to vote once again in favour of lifting the policy

rate. He told MNI in a recent interview that easing back on stimulus in such

circumstances was a "natural" thing to do.

     He may be alone in backing a rate hike at July's meeting, but looks likely

to get support in seeking to end the Riksbank's extraordinary FX intervention

mandate.

     "What I was suggesting was a slight increase in the policy rate from -0.5%

to -0.25%. Still, at those levels I would judge monetary policy to be

expansionary, but only slightly less (so). You slightly ease the pressure on the

accelerator but you don't remove the foot," Ohlsson said in his MNI interview.

     --JUST ONE DISSENTER

     The expectation is that none of the other six board members will vote with

him on monetary policy at the July meeting, although the case for tightening

appears to be strengthening.

     Also slated for the meeting is a vote on the Riksbank's extraordinary

foreign exchange intervention regime. On October 25, the Executive Board voted

to keep this in place. The mandate allows the central bank to intervene rapidly

in foreign exchange markets if needed to ensure krona movements are not a threat

to stabilising inflation around the 2% target.

     Under these arrangements, the Governor and First Deputy Governor can decide

to intervene if they deem that there is no time to wait for a decision by the

wider Executive Board. This mandate expires on July 2.

     --OPPOSITION TO FX INTERVENTION

     In October, Deputy Governors Martin Floden and Henry Ohlsson both opposed

the extension of the FX intervention mandate.

     Ohlsson at the time deployed a similar argument to his one regarding

monetary policy -- that with inflation around target there was no need for such

extraordinary measures, and "interventions on the foreign exchange market could

be managed without a special mandate."

     Floden, who has repeatedly opposed the extraordinary FX intervention regime

-- arguing against it in 2016 and through 2017 -- will surely oppose its

extension again at this meeting.

     This time around there is speculation that the mandate will not be renewed.

If it is axed, this should be seen as a signalling device, marking a return

towards normality in policy making.

     The Riksbank would be sending a message that it sees no likelihood of

needing to prop up the krona at short notice. In practice, however, the move

would likely make little difference. To date, the Riksbank has not undertaken

any such extraordinary FX interventions, preferring instead to let rate

expectations influence the direction of the currency.

     The collective rate forecast is expected to be little changed in the July

Monetary Policy Report, showing a 25bps rate hike is more likely than not in the

fourth quarter, with the door ajar to a small (10bps) rate hike in Q3.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

[TOPICS: MX$$$$]