MNI INTERVIEW: CB Independence Jackson Hole Topic-Riksbank Gov

Threats to central bank independence are set to feature in talks among policymakers at this year’s Jackson Hole symposium, Sweden’s central bank chief told MNI, and continued heightened uncertainty over geopolitics is dampening the boost to consumption from interest rate cuts in Europe.

Riksbank Governor Erik Thedeen spoke just before he sets out to attend the annual policymaker get-together in the U.S. The official topic is labour market dynamics, but he foresees discussions also about geopolitics and trade wars.

"I also think ... central bank independence. The kind of attacks on the Federal Reserve that we've seen from the U.S. administration, that is a U.S. story. But ... are there any kind of risks of that spreading to other jurisdictions? And, even if it doesn't, you know, what happens in the U.S. is extremely important," he said. 

The elevated debt load of many governments is also likely to be a key topic, Thedeen said, though he noted that Sweden has low public debt.

"It is a U.S. story, but it's also story of some European countries and also some Asian countries are there. I think it's a growing, you know, uncertainty, how this will unfold, the whole indebtedness," he said.

UNCERTAINTY DAMPENS CONSUMPTION

In the meantime, high levels of uncertainty appear to be limiting the potency of monetary easing in Europe, he said, speaking after the Riksbank left the door open to another cut later this year as it left its policy rate unchanged at 2% at its August meeting. While business investment should benefit from a clearer trade picture following July’s EU-U.S. trade deal, overall uncertainty remains high, according to Thedeen, highlighting concerns over Russian expansionism. (See MNI RIKSBANK WATCH: Holds In Aug, Door Open To Further '25 Cut)

"If you take Northern Europe ...Sweden, Scandinavia, and also, even more so for Finland and the Baltics, they're worried about their security ... Russia is clearly very aggressive. That is something that, of course, affects your willingness to consume," he said.

Economic theory implies that under conditions of extreme uncertainty "if rates are 4%, 2% or 8% people will still save  ... they will not consume,'" he said, though he noted that there had been some improvement since the last forecast round.

"We are in a slightly better position now than we were in June, but generally speaking, extreme uncertainty makes economic policy harder because you have this precautionary saving," he said.

However, it is possible that consumers and business are also becoming accustomed to a less certain world, he added, noting that there is no straightforward correlation between uncertainty levels and growth.

 The EU-U.S. deal, with 15% US tariffs, at least provides businesses with a figure they can work with and, "if you're on a board and making an investment, I think that's clearly positive," he said. 

CHANGING SCENARIOS

The August meeting was an interim one, with no new economic forecasts or scenarios, which will be updated in September. June’s upside scenario had tariffs raising inflation, and Thedeen said this may require updating.

"Tariffs might not be relevant any longer. So we should have the scenarios that are linked to the world we're living in.”

However, as in June, Thedeen still sees a possible scenario in which the krona, which outperformed G7 currencies in the first half of the year, could remain strong despite soft growth, due to repatriation of funds from unhedged U.S equities exposures in particular. (See MNI INTERVIEW: Risk Of Strong Krona, Weak GDP - Riksbank Head)

"The reasons for this strong appreciation that we saw was very much flow driven, and largely linked to U.S. politics. People basically withdraw from U.S. equities into European equities, and we have a long, strong exposure to international markets. And, generally speaking, I think that narrative holds," he said.

"When the dollar depreciated, as it did, that ... feeds into the value of equity funds, which people don't really realise, and then they get ... worried, and then they withdraw. So I think the dollar is very important.”

The krona dipped early in H2 but Thedeen sees it in longer-term recovery from previous undervalued levels.

In the autumn, the Riksbank will "try to dig in more to where we are on the more kind of very long term fundamental value of the krona, but I think our perception, idea, so far has been that it's still slightly undervalued, but then it's going to be a random walk," he said, adding that dollar developments are likely to be key.