MNI STATE OF PLAY: Riksbank To Hold, Split On FX Mandate

By David Robinson

     LONDON (MNI) - The Riksbank Executive Board looks set to vote unanimously

to leave policy on hold at its February meeting, and could highlight downside

risks as concerns weigh over export demand. But it is likely to split over

whether to extend powers given to its Governor and First Deputy Governor to

sanction emergency foreign exchange intervention.

     According to MNI calculations, implied probabilities suggest a hike is off

the table for the February meeting with a forecast rate path for Q1 2019 of

-0.27%. This is in line with the Riksbank's minutes, which suggested the next

increase could occur in the latter stages of 2019.

     But the FX mandate is up for renewal at the meeting, in which dovish Deputy

Governor Per Jansson will not participate because of a death in the family. Two

board members, Henry Ohlsson and Martin Floden, voted against extending it the

previous time, in July last year. The question now is whether they get fresh

support.

     Floden has been a longstanding opponent of giving Governor Stefan Ingves

and First Deputy Governor Kerstin af Jochnick the power to sanction intervention

without having to consult with the board.

     The January 2016 launch statement described this as "a complementary

monetary policy measure if interventions are considered necessary to ensure that

developments in the krona exchange rate do not comprise a serious risk to the

upturn in inflation."

     But Floden argues that "a situation where foreign exchange interventions

may be justified is remote," and that he does not want to delegate

decision-making in this issue.

     --IMPOSSIBLE TRINITY

     In his academic work he has written extensively on The Impossible Trinity -

the notion that a country cannot simultaneously have free capital flows, a fixed

exchange rate and independent monetary policy.

     Ohlsson's objection in July was that "in a situation with inflation and

inflation expectations close to the target level, potential interventions on the

foreign exchange market can be managed without a special mandate."

     The hot topic now for the Riksbank is not krona appreciation but the

currency's unanticipated weakness.

     Its trade-weighted KIX-index was down 3.6% on a month ago on Friday,

confounding the board's projection that it would strengthen.

     With Sweden an export-dominated economy, concerns about demand in parts of

the euro area appear to be weighing on the currency. The January Swedish PMI

services print of 54.1 was the weakest outturn since April 2016 while

manufacturing PMI matched the Feb 2016 reading.

     On Dec. 20, the Riksbank raised its repo rate by 25 basis points to -0.25

per cent. It was widely described as a "dovish hike," however, with the

accompanying collective forecast for the repo rate suggesting "that the next

rate rise will probably occur during the second half of 2019."

     Weak data since then will reinforce the view that another hike in coming

months is very implausible.

     The board may well stick with that guidance, but the probability of a

second half hike could be nudged lower and its commentary could highlight the

downside risks.

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

[TOPICS: MT$$$$,MX$$$$]