MNI RIKSBANK WATCH: Sept Cut A Close Call As Inflation Rises

The Riksbank’s Executive Board faces a finely balanced call over whether to make one further 25-basis-point cut at its September meeting next week, after having already cut the policy rate to the middle of its neutral range estimate at 2.0% and as both inflation and unemployment edge higher.

The Riksbank’s August guidance was vague, stating that there was some probability of a further rate cut this year, and Governor Erik Thedeen and his colleagues have been careful not to provide any clear signal about September’s likely outcome. Under Thedeen's leadership the five board members have typically united behind a decision despite differences of emphasis beforehand.

Recent activity and inflation data can be interpreted as either compatible with, or tilting against, a cut. The target inflation measure, CPIF, rose to 3.3% in August from 3.0% in July but at the August policy meeting Thedeen suggested that statistical effects, due to a change in weightings, meant that the data may be overstated. The probability of lastingly high inflation was low with some clearly temporary effects, said Thedeen, who reaffirmed this view in a recent interview in Dagens Industri.

Similarly, while growth is expected to rise, recent data have been soft and unemployment has picked up, pointing to more spare capacity. 

Asked in the interview about divided market expectations ahead of the September policy meeting, the governor noted that the decision would be complicated by factors pointing in different directions. (See MNI INTERVIEW: CB Independence Jackson Hole Topic-Riksbank Gov)

BOARD DIFFERENCES

August’s minutes did show nuanced differences between members. Deputy Governor Anna Seim seemed to tilt against a near-term cut, saying that while she agreed that there was some probability of another cut this year, for it to happen she would "like to feel confident that the [upside] inflation risks .... will not be realised."

Her colleague Aino Bunge highlighted weaknesses in the labour market and said that further easing may be needed, while First Deputy Governor Anna Breman talked about the risks of weak demand eventually dragging inflation below target, and that if this risk materialises "one or more further interest rate cuts might be necessary during the autumn."

Board members could split next week, but Thedeen may still be able to preserve unity on the committee if he argues that with the policy rate already low there is benefit in waiting to see if inflation starts to head downwards.