Riksbank commits to rate hike plan, backs off currency lever

Bloomberg

Sweden’s central bank committed to a plan to raise interest rates this year and dropped a mandate that had allowed policy makers to intervene rapidly in the currency market to help drive inflation higher.
The krona gained on the news, after many in the market had expected the Stockholm-based Riksbank to signal a more cautious stance. The bank left the repo rate at minus 0.25 percent, as expected by all 19 economists surveyed by Bloomberg. The decision follows a December hike, which was the bank’s first in seven years.
Knut Hallberg, an analyst at Swedbank, characterized the announcement as “slightly hawkish.” Carl Hammer, the head of macro research at SEB, called the bank’s decision to drop its mandate to intervene in currency markets “sensible.”
Policy makers on Wednesday reiterated their intention to raise rates again “during the second half of 2019, provided that the economic outlook and inflation prospects are as expected.”
“Growth abroad has slowed down, but economic activity will continue to be good over the next few years, with low unemployment and rising wage growth in many countries. There is still substantial uncertainty about the strength of the international economy,” the Riksbank said in its statement.
The Riksbank also gave some guidance on the future of its quantitative easing program. It concluded net purchases at the end of 2017, but principal payments and coupons are still being invested. The bank said on Wednesday it intends to address the question of how to manage future principal payments when the board meets in April. That prompted some economists to urge caution among market participants.
Policy makers in the biggest Nordic economy are adopting a wait-and-see approach as some of the world’s most powerful central banks retreat from earlier efforts to tighten monetary policy. In the US, the Federal Reserve appeared to do a U-Turn late last month, signaling it was putting its rate hikes on hold for now. In Frankfurt, speculation is growing that the European Central Bank will need to respond to the risk of a slowing economy by delaying any planned rate increases into next year.

In Sweden, the Riksbank needs to weigh the need to move out of negative interest rates against the risk of a weaker economic outlook. Though inflation has reached the bank’s 2 percent target, there are concerns that wage growth won’t be strong enough to keep supporting prices.
The development has prompted some economists to speculate that the Riksbank may yet need to rely more on a weaker krona in order to fan import prices. Over the past half decade, Sweden’s currency has lost almost 20 percent against the euro. Economists at Danske Bank have warned that the persistent exchange-rate weakness could be “ devastating” for the Swedish economy.
The Riksbank board’s most dovish member, Deputy Governor Per Jansson, wasn’t present at this week’s policy meeting due to a death in the family. In December, he had entered a reservation against the decision to hike, citing the “considerable uncertainty” in the inflation outlook.