The 4th of July Becomes `Dependence Day' for Swedish Riksbank

  • Riksbank follows other banks in signaling tighter policy
  • Hawkish move comes despite below-target Swedish inflation

The independence of the Swedish central bank stops at the border.

The lack of wiggle room was laid bare on Tuesday, when Riksbank policy makers followed their bigger counterparts in Frankfurt in laying the groundwork for higher interest rates. The lock-step move shows how limited choices are for small, open economies to steer their own monetary policy, especially when rates are far below the zero bound, as in Sweden’s case.

Nordea Bank AB’s head of strategy, Mikael Sarwe, dubbed the decision "Dependence Day."

Eliminating the so-called easing bias “acknowledged the dependency between Riksbank policy and the global trend in monetary policy,” he said.

Exactly a week after European Central Bank President Mario Draghi surprised the markets by hinting that the era of massive stimulus may end sooner than expected, Riksbank Governor Stefan Ingves made it clear in Stockholm that he doesn’t plan to jump the gun.

Neighborhood Pachyderm

"When you are next to an elephant, you have to be careful," Ingves said in a Bloomberg interview when asked whether the Riksbank policy would continue to be dictated by the ECB during the upcoming tightening phase.

"Given our view of the world presently, most likely we’ll stay put until next summer and then start raising the policy rate slowly. But that of course depends on what is going on within the EMU," Ingves said.

While keeping the benchmark repo rate on hold at its current low of minus 0.50 percent, the Riksbank’s board agreed to raise its rate path, eliminating the chances of a cut in the near term. The rate path now envisages rates remaining at their current level until mid-2018 and rising above zero during the latter half of 2019.

The change comes amid tightening signals from the Federal Reserve, the Bank of England and, among others, the neighboring central bank in Norway. The move toward higher rates elsewhere gave Swedish policy makers the chance to lift their own sight a little without risking a jump in the krona, which they are keen to keep weak since a stronger currency could kill any inflation momentum.

Swedish Riksbank Governor Stefan Ingves says won’t raise benchmark repo rate until next summer, and then slowly.

Source: Bloomberg)

“The fact that inflation has recently been slightly higher than expected and that the risks of setbacks abroad are thought to have decreased makes it less likely than before that the Riksbank will cut the repo rate in the near term,” the central bank said. “This does not rule out repo rate cuts in the period ahead.”

Unanimous Decision

Unlike April’s decision to extend an unprecedented bond-buying program until the end of the year, this week’s decision on the rate path was unanimous, Ingves said.

The victory of free marketeer Emmanuel Macron in the French presidential elections has reduced political risks in Europe, while a much feared appreciation of the krona has failed to materialize. But inflation continues to remain stubbornly below target, with the underlying rate not expected to stabilize around the 2 percent mark until next year at the earliest.

New Risks

Still, the bank has been held in a vise by the ECB’s stimulus and now faces new risks.

The mortgage market is "overheating" and highly indebted households need to start preparing for when rates start going up again, Ingves said.

The truth is that the man once dubbed a "sadomonetarist" by Paul Krugman for keeping rates too high didn’t have a choice.

As Danske Bank A/S wrote in a note ahead of Tuesday’s announcement, keeping the easing bias would have made the Riksbank stand out "in a very dovish way vis-a-vis other central banks," with potentially "brutal" consequences for the krona.

Having been forced to follow the ECB down the easing path, the Riksbank is expecting much of the same during the tightening phase.

"One risk for us would be to raise rates too early," Ingves said. "In that respect we are of course partly dependent on what other central banks are doing, not the least the ECB."

— With assistance by Niklas Magnusson

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