Riksbank Board Appointments Seen Opening Door to Easing

Sweden’s central bank may be on the path toward monetary easing after naming two board members who signaled they will focus more on below-target inflation than credit growth.

“Given what they’ve said so far it seems like they’re leaning in a dovish direction,” said Robert Bergqvist, chief economist in Stockholm at SEB AB and a former head of research at the Riksbank. It supports a short term “scenario” for a rate cut in July, he said.

The central bank today appointed Martin Floden and Cecilia Skingsley deputy governors, placing them in an executive body that has been divided over how low to set rates in the largest Nordic economy. They succeed Lars E.O. Svensson, who had called for deeper rate cuts to boost employment, and Barbro Wickman-Parak, who had sought to keep rates unchanged to protect the economy against financial imbalances.

The bank’s General Council was unanimous and the two will start immediately, meaning they will participate in the bank’s next rate meeting in the first week of July.

Floden, born in 1970, is a professor at Stockholm University who has focused on savings and consumption, public debt and monetary policy. He has been a member of the Economic Council of Sweden and the Fiscal Policy Council. Skingsley, born in 1968, was chief economist at Swedbank AB in Stockholm and has also worked as a journalist.

Futures Fall

Futures on the benchmark repo rate fell four basis points to 0.865 percent for September, indicating bets on a quarter point cut to 0.75 percent by then.

The central bank last month pushed back plans to increase its main rate, in part as a strengthening krona reduced inflation. The Riksbank predicts it won’t increase its 1 percent repo rate until late next year.

Floden in September wrote on the economy blog Ekonomistas that the bank’s inability to reach its inflation target has been a “failure” and earlier the same month criticized Governor Stefan Ingves for not presenting as clear arguments for his policy stance as his deputy, Svensson.

Below Target

“I haven’t had any reason to reconsider that position” on Ingves, Floden said today at press briefing. “They’ve been below target for several years. For more than a year, inflation expectations have fallen pretty considerably in different surveys and the economy is pretty weak so that suggests that they could have done more with monetary policy. But then there is this other argument related to financial stability and household indebtedness.”

Svensson announced he would quit after the bank’s latest rate meeting in April, arguing he had failed to gain support for his pleas to boost inflation and support the labor market. Ingves has repeatedly warned against the risks to credit growth if rates stay too low too long.

Policy makers in April voted 4-2 to keep the main lending rate unchanged, in part amid concern over financial imbalances. Household debt has swelled to 174 percent of disposable incomes, from about 90 percent in the 1990s, central bank data show.

Skingsley also questioned the bank’s decisions last month.

‘Bit Hard’

“It is a bit hard to understand that the executive council stayed away from a rate cut” given “the weak macro outlook,” she said in a video on Swedbank’s website last month. It seems like the “majority” is still “concerned about the debt level in Swedish households and they don’t want to contribute to any further expansion in private credits at this stage.”

Consumer prices fell an annual 0.5 percent in April, declining for a fourth month in six. Adjusted for mortgage costs, prices rose 0.5 percent. The bank targets 2 percent inflation.

The board last month voted to delay the timing a planned rate increase by about a year to late 2014 because of companies’ inability to raise prices due to weak demand and a strengthening krona. The krona has appreciated 7.1 percent in the last year to trade at 8.5425 against the euro as of 15:23 p.m. in Stockholm.

“The development of the krona is very important both for how inflation develops and also the economy,” Floden said at the press conference. “In that sense you, of course, have to consider the krona’s development.”

“He’s a very balanced and nuanced economist who primarily of course knows macroeconomic issues but he’s also very good at microeconomics,” said Jonas Vlachos, an associate professor and former colleague of Floden at Stockholm University.

“Both those elected today are very well-balanced so I think it will depend a lot on the circumstances whether they will be characterized as doves or hawks,” said Knut Hallberg, a Swedbank analyst who worked under Skingsley for the last five years. “They are significantly more pragmatic board members compared with Svensson, who created conflicts.”

Svensson’s ally in voting for lower rates, Karolina Ekholm, is the next board member whose term comes up for renewal, which will take place in March 2015. Ingves began a second six-year term last year. First Deputy Governor Kerstin af Jochnick and Deputy Governor Per Jansson joined the board the same year.

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