MNI STATE OF PLAY: Riksbank Seen Hiking 50, Upping Rate Path

Sweden’s central bank is expected to raise its policy rate by 50 basis points to 0.75% at its June meeting, accelerating its pace of tightening after ending its zero-rate policy in April when it hiked by 25 bps.

The Riksbank’s Executive Board also looks set to raise its projection for the most likely path of rates after its target target CPIF inflation measure jumped by 7.2% in May, exceeding expectations and way above the 2.0% goal. In the previous forecast round in April, the board’s main scenario showed the policy rate rising gradually to just over 1.8% three years ahead, while the alternative track peaked at over 2.5% before nudging down to 2.45% at the end of the forecast horizon.

Some analysts now expect the main repo path to be raised to around 2% at the end of the three-year forecast, a move which would probably keep formal Board dissent to a minimum, in line with the consensual style preferred by Governor Stefan Ingves. Other analysts have said that the Riksbank may simply adopt its higher rate forecast, first published in April, as its new central scenario, but such a move would likely trigger formal objections.

A smaller group of analysts think the rate path may even be lowered, with recent activity data showing signs of slowing, but their view is in the minority.

DIVIDED BOARD

The minutes of April’s meeting already showed splits within the board, with two members, Anna Breman and Martin Floden, expressing a preference for a flatter rate path, without formally dissenting on the issue. Breman has highlighted the risk of triggering a downturn, though in a speech on June 9 she stressed that while she argued for fewer rate hikes than envisaged in the central scenario this was contingent on above-target inflation not proving more persistent than expected.

The more hawkish side of the spectrum has also been vocal, with another board member, Henry Ohlsson, saying on May 17 that the repo rate should rise by a couple of percentage points over the next few years. This would take it to a level above that envisaged in the current main scenario though probably still a shade below the higher rate projection path.

The board must also consider whether to further reduce its projected pace of asset purchases, though with the policy rate its main tightening tool board members may see little advantage in such a move. With large redemptions looming the central bank is aiming to shrink its balance sheet, but less rapidly than if it allowed natural run-off.

In April , the Riksbank announced that it would purchase SEK37 billion in bonds in the second quarter and the same amount again spread over all of the second half.