- Riksbank is signaling a changed reaction function, Nordea says
- Nordea questions decision to cut CPI outlook but not rates
“It’s still the most powerful monetary policy handgun in the world and would blow my krona position clean off my trading desk. I’m a punk and I don’t feel that lucky...”
The Dirty Harry reference has been recast by Mikael Sarwe to convey his dismay at Sweden’s Riksbank. The Nordea head of research says the bank’s monetary policy has finally become impossible to read. Sarwe is struggling to figure out whether the Riksbank’s latest signals point to more stimulus or not.
“I’m basically lying on my back with Dirty Harry still pointing a .44 magnum at me, trying to figure out whether he has a bullet left or not,” he said in a note on Friday.
The Riksbank left all its main policy levers untouched at its latest meeting last week. The repo rate is still minus 0.35 percent and a bond-purchase target was reiterated. The news sent the krona up 1.2 percent against the euro on Thursday, in part as the Riksbank’s announcement coincided with noises of more stimulus from the European Central Bank.
Riksbank Governor Stefan Ingves said in an interview the same day he’s “happy” with the exchange rate. He also made clear policy makers can cut again should the krona strengthen “too soon or too much.”
But the main problem with the Riksbank’s decision to do nothing was the inflation math that underscored the move, according to Sarwe.
After years of disinflation, and even bouts of deflation, the Riksbank cut its inflation outlook. If policy makers really expect price growth to be weaker than they had estimated previously, why didn’t they cut rates, Sarwe asks. The failure to do so suggests a “changed reaction function,” he said.
The Riksbank will still react if the krona continues to strengthen or if ECB President Mario Draghi delivers on his signals of extra stimulus, the Nordea analyst said.
But even with Ingves now effectively telling the market to “Make my day,” Sarwe anticipates traders will test his resolve by bidding up the krona in the period ahead.
As for the added confusion and the Riksbank’s shifting analysis: “That’s life,” Sarwe said in a phone interview.