MNI STATE OF PLAY: Riksbank Split On Balance Sheet Shrinkage

The Riksbank looks set to leave its policy rate unchanged in February, but Executive Board members will need to find agreement on whether to begin shrinking the balance sheet or changing guidance and pulling forward the projected timing of the first hike from the second half of 2024.

November saw the Repo Rate left at zero, with the first hike only projected towards the end of the three-year forecast period. However, the minutes highlighted divisions on the board, with some members open to ending the reinvestment of maturing assets and some sympathetic to an earlier projected rate hike. Governor Stefan Ingves has opposed both early balance sheet shrinkage and an earlier hike projection and he may get the majority on the board to hold the line in February, but it could be a close call.

BALANCE SHEET

With a recent history of soft inflation data, many on the Riksbank board believed the aftermath of the Covid could be dealt with by sitting tight for a while, halting asset purchases, keeping its asset stock unchanged and leaving the policy rate on hold for a protracted period, with any inflation overshoot justifiable in light of the prolonged undershoot.

Spikes in inflation abroad, criticism over the central bank’s asset purchases distorting Sweden’s relatively shallow debt markets (MNI INTERVIEW: Riksbank Should Exit Bond Markets Fast-Official) and the strength of the economic recovery have all combined to tilt the scales towards earlier action.

SPLIT

Of the six voters, Ingves and Deputy Governor Cecilia Skingsley have previously flown the flag for policy stability and Per Jansson suggested that even the single hike in 2024 may be unjustified. On the other side, Anna Breman and Martin Floden have expressed support for early balance sheet shrinkage and Henry Ohlsson only expressed support for near-term reinvestment, leaving it open what should follow.

The board agreed to reinvest nearly all the SEK38.5 billion of assets maturing in the first quarter and its current forecast is that asset holding will remain broadly unchanged in 2022, only declining after that. Breman, however, said in November that “it may be appropriate to taper reinvestments further in 2022, but that it is reasonable to take decisions one quarter at a time.”

Floden advocated a trial-and-error approach, arguing that a degree of tapering of asset purchase reinvestments "in coming quarters" was advisable if it did not significantly affect markets.

The bar appears to be slightly higher to significantly advancing the projected timing of the first hike, with Floden saying that it would take a lot to convince him and Ingves, Skingsley and Jansson also likely to be opposed to the idea.