MNI INTERVIEW: Riksbank's Thedeen Sees Policy Rate Stimulative

The pick-up in Swedish economic activity suggests the Riksbank’s current policy rate of 1.75% is stimulative, despite its being near the bottom of the estimated range for the neutral rate, Governor Erik Thedeen told MNI.

"We see now an upturn on the growth side. That's an indication that we're stimulating the economy. Inflation has been more bumpy because it was partly ... supply driven," Thedeen said in an interview following a UBS event.

"The upturn in inflation we saw in the middle of the year is probably not driven by the demand side. It was foreign travel, car rental, what have you. But I think if you look at the growth numbers, it seems like we are stimulating the economy because it's actually picking up.”

The Riksbank’s most recent estimate for the neutral rate is that it lies somewhere between 1.5-3.0% in nominal terms. While a series of rate cuts means the policy rate is now below the mid-point of that range, Thedeen warned against spurious precision over the neutral rate, or R-star. (See MNI: RIKSBANK WATCH: Holds In Nov, Foresees Prolonged Pause)

"Sometimes it annoys me that people say that 2.25 is the number, and then now you're at two (or below) so you're stimulating. You don't know that," he said, describing the process as "trial and error."

BUDGET STIMULUS

While the Swedish government’s 2026 budget is also set to add stimulus to the economy, the fiscal multipliers attached to it are unlikely to be large, Thedeen said. 

The budget contained almost SEK80 billion in unfunded policy changes, equivalent to around 1.2% of GDP, with increased defence spending and Ukraine aid exempted from balanced budget rules

Hiring soldiers likely has "a higher multiplier. If you're buying naval ships from France, which could be one option now, or the UK, then, of course, the multiplier is very low ... Generally speaking, I would say that defence spending is probably a fairly low multiplier," he said.

"We think that the multiplier of the overall package is not super high, so that's why we don't have this really, really strong feature in the growth numbers.” (See MNI INTERVIEW: Riksbank Head -Equal Chance Next Move Cut, Hike)

OVERHAULING OPERATIONAL FRAMEWORK

As it moves towards balance sheet normalisation, the Riksbank is looking at widening the interest rate corridor between its standing deposit and marginal lending facilities to encourage participation in interbank markets, without compromising banks' willingness to borrow from the Riksbank when necessary by lowering the interest rate premium on the central bank’s own Supplementary Liquidity Facility.

Asked when the reforms announced in September would come in, Thedeen said "We don't have a fixed timetable. We're heavily involved now in internal research ...[and] also interacting with market participants.”

Market participants have judged that the central bank's use of certificates to mop up liquidity has fuelled volatility. Thedeen said that the question of whether certificate usage could add to market volatility was under discussion.

Recent volatility "has pushed a little bit of momentum into the question ... It's something that we need to produce some kind of outcome in the medium-to-short term," he added. (See MNI INTERVIEW: Swedish DMO Unfazed By Bond Market Volatility)

"Some central banks ... have come to another conclusion, that 'we will never get this market functioning anyway, so let's have ample liquidity'. We're not going down that route," he said, though he acknowledged that the drive for increased interbank lending faces significant hurdles.

The Riksbank's operational framework is dominated by a small number of large banks and, since 2020, half of its counterparts, the medium-sized and smaller banks, have never participated in interbank overnight transactions.

With the central bank's liquid assets around SEK500 billion, "there should be no scarcity. But then we introduce the certificates, and then you're down [by] SEK100 billion, still fairly large. But of course, it's not evenly distributed among the banks," he said, adding that "certificates is one thing that we need to think through."