MNI INTERVIEW: 50/50 Hike Chances Due To Iran Doubts-Thedeen

The Swedish central bank’s new policy guidance that there is a 50/50 chance of either a prolonged hold or a hike was made after a lengthy discussion of the uncertainty surrounding a prospective U.S.-Iran peace deal, Governor Erik Thedeen told MNI.

The Riksbank left its policy rate on hold in June and raised its rate path without fully factoring in a hike this year. It was one of the first of the central bank pack to set policy following news of the U.S.-Iran Memorandum of Understanding, and Thedeen stressed that while this came too late to be factored into the quarterly forecasts it was incorporated into the decision and guidance.

The Executive Board’s discussion focussed on risks around the deal, he said.

"Where will it end up? Will it actually be an agreement? Will it be followed? Will [ships] actually be able to pass the Hormuz Strait? You know, all that is still uncertain today," Thedeen said in an interview.

The Riksbank could change its forecasts once things become clearer, "but we're not there yet ... [there's a risk] of more conflict growing between Israel and Hezbollah, and all of a sudden we're in a different situation," he said.

"What people are doing ... is jumping to the conclusion that we're in a different world. That has not been in our thinking, we are thinking 'this is the declaration,' it's had some effects on the oil price, and we still have a lot of uncertainties.” (See MNI INTERVIEW: Signs Swedish Inflation Pressure Rising - NIER)

 KRONA AND THE ECB 

While interest rate differentials could weigh on the Swedish currency, particularly after the European Central Bank’s hike last week, this was not a constraint on policy setting, Thedeen said. The krona depreciated about 0.2%, at 10.89 to the euro, five hours after the decision.

"I don't think it limits [us]," he said, adding that the board does not take the view it "can't do something because we're so worried about a specific interest rate differential, but of course we are aware that this could have an effect on the krona.”

The rate differential "effect is far from direct" he said.

While the krona strength of the past 18 months is fading, Thedeen noted that it was "one of the reasons why, especially goods, inflation has been subdued," he said.

"Okay, it's been slightly weaker since, but nothing compared with the strengthening we had last year. So, this is still a factor that is important, I think, for this decision. And if you look on the changes since March, it's not dramatic, right? So, I think the big picture is still that some of the strengthening is still feeding into the kind of price setting, but less and less, I guess, as time passes."

"We don't have persistent deflationary forces from the strengthening last year in our forecast," he added.

REVERSING QT AND LIQUIDITY

The Riksbank has been at the front of the pack of central banks in reducing its stock of assets built up through QE, and is committed to a path of ending its abundant reserves system, though lack of interbank liquidity is a concern.  (See MNI INTERVIEW: Market Absorbing Swedish QT Bonds - Riksgalden)

"We're very committed to bringing down our balance sheet, and we've been showing that also in action, both active QT and the more passive QT that brought down the balance sheet fairly quickly and quicker than most other central banks. I would argue we still have excess liquidity, also due to the FX reserve, which is financed … by ourselves," he said.

"There've been some bumps in the interbank market, nothing dramatic, and you know, lately, nothing," Thedeen said.

In order to boost liquidity "we don't exclude the possibility to lower the rate on the floor, and that's basically where we are. I think we are in fairly good position to actually manage to bring this from an abundant liquidity system, [where] everything is in a deposit in the central bank in reserves, into a … corridor system. That's what we're aiming at," he said. (See MNI INTERVIEW: Higher Bar To Future Riksbank QE - Thedeen)