MNI STATE OF PLAY: Riksbank Sticks With Zero Rate Forecast

Sweden's Riksbank left its key policy rate at zero percent following its June meeting and is still projecting rates to stay at that level for the whole of its 3-year forecast horizon.

The Monetary Policy Report (MPR), published Thursday, projected unchanged rates despite an increased inflation profile. Prices are expected to rise temporarily before receding and then move back just above the 2.0% target on the CPIF fixed-income rate measure as the global recovery strengthens.

Nevertheless, the Riksbank decided it was too early to start signalling tightening either by lowering the asset purchase target or predicting a hike down the road, maintaining the current envelope for asset purchases at SEK700 billion. It reiterated that this would be used fully through to the end of 2021, with purchases slowing as the year progresses to SEK68.5 billion in Q4, and noted "risks associated with reducing stimuli too soon are greater than the risks of keeping them for too long."

INFLATION

While the current sharp prices rises are expected to fade, the Riksbank predicted inflation would remain higher than it previously assumed, raising its CPIF projections to 1.8% from 1.5% for 2021, 1.7% to 1.4% for 2022 and to 1.8% from 1.7% for 2023. The forecast showed CPIF moving above 2.0% from March 2024 and staying above 2.0%.

With the krona projected to remain broadly flat through the forecast on a trade-weighted basis, its dampening effect on inflation is expected to disappear and, as the global economy recovers, the rate of price increases is expected to firm.

That inflation profile could give the Riksbank some grounds to justify showing the policy rate starting to move higher if the recovery remains strong. Market rate expectations ahead of the Riksbank meeting were for the repo rate to rise 0.25 per cent during the second half of 2023, rather than remain unchanged through to the third quarter of 2024 as policymakers forecast.

Nevertheless, the RIksbank continues to place weight on the argument that a period of above-target inflation, after prolonged undershoots, may help strengthen the credibility of the inflation target rather than undermine it.

The MPR contained detailed analysis of supply chain disruptions that have hit Swedish manufacturing, with computer chip and freight container shortages hitting production and bottlenecks fuelling price hikes, but policymakers see the recent sharp price increases in many economies proving temporary as logistic lines are repaired and as base effects from the sharp fall in commodity prices when the pandemic hit evaporate.