MNI INTERVIEW: Higher Bar To Future Riksbank QE - Thedeen

Sweden’s Riksbank aims to issue certificates to reduce the volume of reserves, Governor Erik Thedeen told MNI, adding that the hurdles before restarting any future round of quantitative easing will be higher than previously.

"We are having an intense discussion with market participants to increase their ability to even out liquidity in the banking system," Thedeen said, adding that these discussions are yielding some "positive signs."

"We still have a lot of liquidity in the system. And we could also see in the last auctions or with the certificates, that it seems like the market participants want to have a bit more reserves going into year end."

FUTURE QE

The Riksbank will be more careful before deploying quantitative easing in the future, Thedeen said, after confirming that the Bank has ceased its active nominal bond sales.

"The hurdle to go into QE for inflation or deflation reasons is pretty high. There are reasons to be prudent here," he said, adding that "I think where our hurdle is higher now than it was" before the post-Covid bout of QE.

However, Thedeen said that bond purchases to maintain financial stability were in a different category.

"It's fair to say that the board is less sceptical to financial stability reasons for QE than we are when it comes to inflation-fighting reasons."

POLICY RATE PATH

The Riksbank's projections see the policy rate held at 1.75% through Q3 2026, whereas market participants have priced in a greater-than-even chance of a hike next year. Thedeen said he sees "a fairly balanced” risk picture. (See MNI RIKSBANK WATCH: Holds, Edges Up Rate Path)

"I think that you have some inflation risk on the upside. On the other hand, we have sometimes also been surprised by surprisingly low inflation," he said, pointing to global uncertainty as a factor that could cause households' activity to become more depressed.

Overall, Thedeen judged that "inflation pressure is very limited... we'll see whether we are right or the market is right."

Official data "points to a gradual kind of improvement of the labour market," he said, but answers on employment to the Riksbank's business surveys "are more muted, they don't seem to be so optimistic on actually being able to hire more."

"To what extent we actually see a stronger labour market ... I think that remains to be seen," he said.

Nevertheless, "we are fairly certain that the economy has switched, and that it is turning upwards towards fairly good growth next year," he said. (See MNI INTERVIEW: Riksbank's Thedeen Sees Policy Rate Stimulative)

CURRENCY STRENGTH

The krona has been the strongest-performing currency among G10 economies this year, and Deputy Governor Anna Seim recently gave a speech arguing that while changes to the exchange rate to the dollar are hard to forecast, they can be modelled after the fact.

"My general thinking around the krona is that it could be explained, you know, in retrospect, but it's very hard to have as a forecasting model, as I think that you should be humble and spell that out," Thedeen said.

However, he pointed to "fairly good fundamentals ... of the Swedish economy," which may make individuals and funds a "little bit less prone to invest internationally than they were," because "they were hit by the stronger krona."