MNI RIKSBANK WATCH: Hold Likely, With High Bar To Another Cut

Sweden’s Riksbank looks near certain to leave its policy rate on hold at 1.75% when it announces its next decision on Nov 5, having set a high bar to further easing following its 25-basis-point September cut, its eighth in just over a year.

Thedeen told MNI following the September meeting that the next rate move could be up or down and that, while uncertainty was extreme, the Riksbank appeared to be at a turning point. The in-house rate path published in September signalled that, if things evolved as expected, the policy rate has troughed. 

In a rare show of dissent on the five-member board under Governor Erik Thedeen's stewardship, Deputy Governor Anna Seim voted to keep policy on hold in September, and the meeting’s revealed that she envisaged the possibility of a rate hike down the line. Seim noted that Sweden's usually rule-bound fiscal policy was becoming more stimulative given that defence spending and Ukraine aid were excluded from the framework and that this, coupled with low interest rates, meant there was a risk that "the overall stabilisation policy at present will become too expansionary."

The majority view and central projection, however, pointed to a prolonged period of a flat policy rate. The view among analysts is that there will be no near-term change.

NO RECOVERY

Thedeen told lawmakers on Oct 21 that officials "feel more confident that inflation is coming back down," after its prolonged above-target run, and that while economic recovery has one again been delayed a number of factors support an acceleration in growth. 

The Riksbank's business survey this month underlined the message that the hoped-for economic recovery has yet to take-off, with the Business Survey indicator continuing its decline since May and still below its historic average.

One potential change in the pipeline is to the RIksbank monetary framework.  While the Bank of England and the European Central Bank are steering to demand-driven floor systems, meeting commercial banks and others participants desired level of reserves, the Riksbank operates a corridor system.

The Riksbank has been consulting with counterparties and in a speech Thedeen floated the possibility of widening the interest rate corridor, the gap between deposit and lending facilities, and lowering the rate premium on the supplementary liquidity facility. But the consultation is not scheduled to finish before the end of the year, and the Governor is sensitive to the risk of dislocation between policy and money market rates, so November may be too soon for any changes. (See MNI INTERVIEW: Riksbank Head -Equal Chance Next Move Cut, Hike)