Riksbank governor sees rate hike sooner than ’24

Bloomberg

The Swedish central bank will probably have to raise interest rates earlier than its previous timeline of 2024, Riksbank Governor Stefan Ingves said, signalling a shift on removing stimulus after lagging behind most of its developed peers.
“Right now inflation is far too high,” Ingves said in an interview with Swedish Radio, adding the central bank has to “rethink” its stance. Speaking to reporters in a webcast, he said “we cannot rule anything out,” when asked if a rate hike might come already this year, while adding it is too soon to say what happens to Riksbank’s balance sheet.
The governor’s comments follow a large change in economists’ expectations on the central bank’s course of action after inflation figures have exceeded forecasts since October. All major domestic banks now predict a first rate increase since the pandemic this year, which would mark a radical departure from current plans.
“Inflation is likely to rise further due to a lot of things happening in world markets,” Ingves said in the radio interview, adding that the Riksbank however “cannot control the prices of oil, electricity or wheat.”
The krona advanced by as much as 1.4% to 10.4614 per euro, the strongest level in more than a month, after the news.
Investors are pricing in almost two 25 basis point hikes this year, with three-month forward-rate agreements maturing in December rising to 0.49%. They settle to the Swedish interbank offered rate, which is at 0.05%.
While most economists believe the bank will increase borrowing costs by 25 basis points in September, market pricing suggest that Ingves and his colleagues may pull the trigger as soon as July. Their next rate decision is scheduled to be announced on April 28.
Sweden’s policy makers have been among the most reluctant to withdraw stimulus in the developed world, a stance that analysts partly attribute to lessons learned when previous tightening had to be reversed after the financial crisis.
The Nordic nation has recovered briskly from the pandemic and its economy is showing signs of overheating, prompting critics within the bank as well as externally to push for withdrawing stimulus. At its meeting in February, the Riksbank said it expected the benchmark rate to remain at zero until the second half of 2024.
Pressure on Ingves has also been growing internally, with three board members pushing for a reduction in the central bank’s bond holdings in the coming quarter, according to minutes from its meeting last month.
Ingves told reporters the Riksbank’s balance sheet can “technically get both smaller and larger,” adding “the Riksbank is able to use the balance sheet in an efficient manner the day we’ve decided what to do.” He said the central bank has until April “to think about these matters.”
“The Swedish economy is doing well, but at the same time uncertainty has increased,” Ingves told Swedish Radio. “That uncertainty naturally increases with the ongoing war in Ukraine.”