MNI INTERVIEW: No Hike Delay If Shock Lasts-Riksbank's Thedeen

The Ukraine energy price shock has shown that it is better not to delay tightening in the face of prolonged higher inflation as a result of a supply squeeze, Riksbank Governor Erik Thedeen told MNI on Thursday.

"Most central bank have admitted that, in retrospect, they agree that they were too late in hiking. I wouldn't overstate that, because basically, we didn't hike in February '22  (when Russia invaded Ukraine), we did hike in April," Thedeen said in an interview after the Riksbank left its policy rate on hold at 1.75%.

"I think what the lessons from '22 taught us was that we can't just take this kind of school book (approach to a) supply shock, look through," he said, adding that "it's typically much more complicated."

While the Riksbank published a central scenario alongside its March decision showing a prolonged policy pause assuming only moderate upside inflation effects from higher energy prices due to the Iran war, it also set out a high-inflation scenario. If the latter materialises, Thedeen made a case against waiting to hike.

The Riksbank was happy to look through a rise in electricity prices during Sweden’s recent cold winter, Thedeen noted, but the increases faded away as the weather warmed while the effects of the Iran war look more serious.

"That's a very typical kind of school book supply shock. This (the Iran shock)  is something a little bit different. How different? Well, that remains to be seen," he said.

KRONA STILL IN FOCUS

The Swedish krona saw prolonged appreciation in 2025, putting it at the top of the advanced economy currency pack. The Riksbank's latest central forecast is for a flatlining policy rate while European Central Bank tightening is on the cards, entailing interest rate differentials could weigh on the krona, but Thedeen is sceptical.

Back in 2025 the krona heavily outperformed the Norwegian krone despite the Norges Bank setting a substantially higher policy rate, he noted.

"The interest rate differential didn't matter. Sometimes they matter a lot. Sometimes they matter less. ... If we have a strong, low inflation environment, and we  keep rates, as we say, at 1.75 and let's say the ECB has a more worrying development and they hike, is that clearly a krona-negative scenario? I'm not sure," he said. (See MNI INTERVIEW: Not Clear Krona Undervalued - Riksbank Head)

SWEDISH RENEWABLES 

Sweden, with hydro power, particularly in the north of the country, and a nuclear energy supply, is better protected than many other countries against the inflationary effects of an oil and gas spike, but Thedeen was cautious, pointing to a squeeze in electricity prices in southern Sweden in 2022 as European natgas prices soared.

While current warmer temperatures may weaken the link with gas prices, other variables include unscheduled nuclear plant shutdowns.

"This is complex, but for sure we are in a better situation than many of our European peers," he said.

NOT RULING OUT WIDENING RATE CORRIDOR

The Riksbank is in the process of consulting with market participants on a new monetary framework, which would see it use its Supplementary Lending Facility when needed to avoid liquidity shortages, as it moves away from the abundant reserves associated with quantitative easing.

The central bank has intended to make the SLF more attractive through cheaper pricing and accepting wider collateral, but Thedeen accepted that widening the rate corridor was "not the first option, but it is an option."

"I think we increasingly are convincing the market that we are not going for a floor system, we are going for a corridor system," he said, on the move away from abundant reserves.

"Now QT has reduced that, but we still have oversupply of liquidity because of, probably, the funding of the FX reserves," Thedeen said. (See MNI INTERVIEW: Higher Bar To Future Riksbank QE - Thedeen)

Some participants have asked whether change is needed but Thedeen said they have stressed that the move to a new reserve system is coming.  

"We need to convince people that that's the direction we have .... And we are also taking some steps that [have] been asked for by market participants. But again, we have not ruled out the corridor widening.”