MNI INTERVIEW: Riksbank Head -Equal Chance Next Move Cut, Hike

The next rate move by Sweden’s central bank could equally be a hike or a cut with dissents more normal at policy turning points, Riksbank Governor Erik Thedeen told MNI after the policy rate was lowered 25 basis points to 1.75% on a split decision.

Asked whether the rate path in September's quarterly projections, which shows the policy rate at 1.8% next year before edging higher, implied equal probabilities of an increase or a decrease, Thedeen replied: "That's the mathematical logic to it. So I wouldn't deny that .… but it's extremely uncertain."

Thedeen's time as governor, starting in January 2023, has been marked by remarkable consensus, but this time Deputy Governor Anna Seim voted against the cut. Thedeen noted that there was also a dissent at his second meeting and there have been some differences of opinion since, but that this split reflected both greater uncertainty and a policy turning point.

"There's great uncertainty. It's natural when you come to a turning point. It's natural that different members of the committee end up [with] ... a little bit different calls on what where to go or where to end," he said in an interview, adding that the system is "built on five independent members. They should make their own judgement." 

RESILIENT KRONA SCENARIO

In an alternative, lower rate path scenario, the Riksbank envisaged stock market declines hitting business and consumer confidence, but that the krona would remain resilient as in earlier episodes of U.S.-led market turbulence.

"The fact that we assume a stable krona ... it's not an unreasonable scenario, but we don't put any probability [on it],"  said Thedeen, who has previously referred to repatriation of funds by Swedish firms. Work by BIS economic adviser Hyung Song Shin and co-authors has also linked dollar weakness to an increase in currency hedging by non-U.S. investors. (see MNI INTERVIEW: Risk Of Strong Krona, Weak GDP - Riksbank Head)

"The hedging is still a very topical issue. No one knows the answer to it, but I think there's been some kind of ... habit in [firms] not hedging, because you always kind of earn money from not hedging when the dollar was strengthening all the time," he said.

"So some kind of backlash to that should be [there in the] short term for sure. People are hedging because of the strong decline that we saw ... I guess that it will also create some discussions in boardrooms and investment committees that maybe the hedge ratio should be slightly different going forward," he said, noting that the quantitative impact on the dollar of increased hedging was still unknown. (See MNI INTERVIEW: FX Hedging Could Weaken Dollar, Scale Unclear)

SHRINKING BALANCE SHEET

The Riksbank is also re-designing its operational framework as it runs down its bond holdings accumulated during its period of quantitative easing, when it had effectively, according to Thedeen, switched to a floor system, with abundant reserves supplied to banks and money market rates falling towards the official deposit rate.

Now it is aiming for a corridor system, in which reserves are more scarce, and lending and deposit rates create a rate corridor, he said. The Riksbank is also considering widening this corridor, and encouraging commercial banks to move away from central bank reserves into longer-term market operations, including CB certificates.

This however brings a risk of volatility, which could de-couple the policy rate and market rates, he acknowledged.

"If you have a wider corridor, it's going to be a wider spread in interest rates. And hence, maybe the overnight ... and other kind of money market rates will be more volatile. For sure, it's a concern. ...That's why ... we are consulting on it, and we are eager to push the banks to actually work more with the lending facilities," Thedeen said, noting that the Riksbank wishes to avoid any misalignment between policy and market rates and that the consultation will be held over the coming months.

"The active money market is not so active any longer," as banks have become used to abundant reserves, he said.