MNI STATE OF PLAY: Too Soon For Riksbank To Signal Tightening

The Riksbank may slightly boost forecasts for growth and inflation in its quarterly Monetary Policy Report on Tuesday, but policymakers are likely to leave their collective rate forecast flat at the current 0% over the next three years, judging it too soon to start signalling future tightening after a prolonged inflation undershoot.

Sweden's central bank will also fill out details of its asset purchase programme for the second half of the year. But, with sovereign debt buying hitting limits, ­­­­­the programme's broad outlines, of using up the SEK700 billion asset purchase envelope in 2021 and "after that to keep the asset holdings more or less unchanged over the next year" are unlikely to be altered.

Policy makers will be aware that signalling a hike would tend to strengthen the krona, exerting downward pressure on inflation. Despite the strengthening recovery, April policy guidance is unlikely to push back against the possibility of a return to negative rates.

The scale of upward revisions to the outlook is likely to be modest. The February MPR took on board the economy's resilience to the pandemic, with growth in 2020 revised to minus 2.8% from minus 4.0% and for 2021 raised to 3.0% from 2.6%. The updated IMF forecast for Swedish real GDP growth this year is almost dead in line with the central bank's, at 3.1%.

RATE CUT?

The Riksbank is likely to leave open the possibility of negative rates further down the line.

In February's minutes, board member Martin Floden argued that an inflation overshoot would restore credibility after a lengthy undershoot, while Anna Breman said a rate cut might stimulate demand once vaccinations ease pandemic restrictions.

IMF staff, in their Article IV review of Sweden, published last month, noted that the Riksbank has been faced with a scarcity of sovereign bonds to purchase and its acquisition of proportionately high levels of private sector debt risks creating market distortions.

Floden said that while the Riksbank has moved along the yield curve "the monetary policy effect of buying bonds with long maturities is small … because it is very rare in Sweden that households or companies take loans or issue bonds with an interest rate fixed at longer durations than five years."