MNI STATE OF PLAY: Riksbank Split On Policy; Board Divided

By David Robinson

     LONDON (MNI) - The Riksbank Executive Board is likely to be divided again

at next month's Monetary Policy Meeting, with Sweden's Sep 9 general election

casting a shadow over the central bank's decision making.

     The six-member Executive Board is likely to vote for unchanged policy at

the September meeting, with views expressed at the July meeting suggesting a

five-one or four-two vote to stand pat. 

     In July, one member, Henry Ohlsson, backed an immediate hike, another,

Martin Floden, advocated a hike "in September or October this year" and a third,

Cecilia Skingsley, supported a hike in October or December. The other three,

including Governor Stefan Ingves, advocated caution.

     The data since July have not been robust enough to make any change of heart

among the more dovish members likely.

     --SERVICE INFLATION

     At the heart of the case for caution made by the three doves -- Ingves, Per

Jansson and First Deputy Governor Kerstin af Jochnick -- was the softness in

services inflation.

     "It may be difficult to achieve the inflation target in the long term if

prices for services continue to develop weakly," Ingves said then.

     The subsequent data showed that in July services price inflation fell to

1.2% on the year from 1.5% in June. 

     "If the weak growth in prices for services continues, there is a risk of

inflation not stabilising around 2 per cent (the target level) as we forecast,"

af Jochnick said.

     The Executive Board's collective interest rate projection, showing policy

rate-levels on a quarterly basis, provides clues but no definitive answer to the

likelihood that the board attaches to a rate hike at each monthly meeting.

     The July rate projection, on Market News calculations, was compatible with

a 40% chance of a hike in October with a 25 basis point rate increase fully

priced-in by January next year.

     Broadly in line with that outlook some analysts have predicted that the

first hike will come in the fourth quarter while others have gone for the first

quarter of 2019. Others, however, have forecast that the hike will come even

later, on the grounds that inflation will prove softer than the central bank has

predicted.

     --ELECTION UNEASE

     The Executive Board's policy decision will be unveiled on September 6 with

the general election looming on Sep 9. 

     That election is fuelling political uncertainty. The strength of the

nativist Sweden Democrats has fuelled debate over the likely shape of the ruling

coalition. 

     There has been talk of forming a grand coalition rather than a traditional

centre-left or centre-right grouping, given the latter groups' desire to exclude

the Sweden Democrats.

     If the currency is hit by the political turbulence, the Executive Board

will have to deal with an extra layer of complexity, with Skingsley noting it

could "burden the krona for a while longer," Skingsley said.

     Floden has cited krona weakness as a reason to back earlier monetary

tightening but if the currency is depressed by electoral uncertainty,

policymakers may be more inclined to look through such a move while waiting to

see how the political landscape unfolds.

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

[TOPICS: MX$$$$]