MNI RIKSBANK WATCH: On Hold, But Eyes On Hike Signals

The Riksbank looks near certain to leave its policy rate unchanged at 1.75 percent at its December meeting with the focus on whether or not it tilts its rate path up, aligning it better with market pricing that the first hike could come at some point in 2026.

The December MPR could bring the timing of a hike forward, with recent growth data strong, but with inflation on the down path the more likely outcome in the face of elevated uncertainty will be to continue to signal a prolonged policy pause.

In its most recent Monetary Policy Report, the Riksbank put next to no weight on a hike next year, with the policy rate shown holding at the current 1.75% through the first three quarters and only nudging up to 1.77% by year end. 

In November, Governor Erik Thedeen said that leaving the policy rate at 1.75% "for some time to come" reflected a reasonable trade-off between the risks of continued elevated inflation and of it falling below target.

GROWTH ACCELERATION

In an MNI interview following the November meeting, Thedeen said that the acceleration in growth was evidence that the central bank's policy setting was stimulating the economy. (see MNI INTERVIEW: Riksbank's Thedeen Sees Policy Rate Stimulative )

The data since September has shown even stronger growth in Q3 than the central bank expected, up 1.1% on the quarter compared to the Riksbank's 0.5% forecast.  Inflation, however, has been heading downwards and the Riksbank has forecast that on its target CPIF measure it will be under 1% for large parts of 2026. The latest data showed that it fell to 2.3% in November, down from 3.1% in October.

The Riksbank Executive Board has started to fracture, with Deputy Governor Per Jansson stating in the November minutes that he was more worried about downside risks, while his colleague Anna Seim highlighted upside risks, with the divisions adding to uncertainty over the chosen rate path.

Policymakers are also looking to overhaul the operational framework, considering widening the interest rate corridor, between its standing deposit and marginal lending facilities, in order to boost interbank market activity. 

The interbank market has been dominated by a small number of large banks in the region and Thedeen has said that recent market volatility has injected urgency into the proposed reforms, although it remains to be seen if he will be able to announce a clear timetable this month.