Riksbank zeroing in on first rate increase in seven years

Bloomberg

Sweden’s central bank could next week give a clearer signal that it’s ready to tighten already in December as policy maker are growing eager to end almost four years of negative interest rates. Governor Stefan Ingves and his colleagues are on Wed-nesday expected to keep their benchmark unchanged at minus 0.5 percent, but could signal a greater probability that they will move before the end of year rather than wait until February.
The bank is plotting an exit from an era of extreme monetary policy as inflation is now showing signs of stabilizing around its 2 percent target after years of anemic price growth. It’s joining other banks, such as the US Federal Reserve and the European Central Bank, in withdrawing stimulus even as doubts grow over the global economic outlook.
Helped by a massive dose of stimulus over the past four years, Sweden’s economy is in its longest expansion since the early 1980s and policy makers are now finally seeing price growth tick up. Inflation reached the highest level since 2008 in September, leading several prognosticators to revise their forecasts to expect a December increase.
“December is alive as long as inflation is in line with the Riksbank’s expectations,” Anna Breman, chief economist at Swedbank, said in a phone interview. “When the board announces its rate decision in October they may try to prepare the market more for that a rate hike is coming in December.”
But they are unlikely to go too far out on a limb, with core inflation still below target and amid signs the economy is cooling. Despite the krona being the worst performer in the Group-of-10 this year, policy makers are still worried that any tightening signals could trigger a fast turnaround in its fortunes, and again drive inflation lower. Breman said that could lead the bank to pull off a so-called dovish increase in December, meaning it raises rates while at the same time lowers its outlook for rates ahead.
A clearer indication of a tightening in Dec could go some way in healing a split on the bank’s board. Two of its members, Martin Floden and Henry Ohlsson, have been advocating for faster increases and could argue for one next week, while a majority have called for more caution.
Swedbank, Knut Hallberg, senior economist, said, “The Riksbank will probably make it clearer in October that an increase is approaching, “perhaps even raise the probability in the rate path for a rate hike in December compared to February.” Danske Bank Chief Economist Michael Grahn said, “The Riksbank will deliver a December hike and then tighten again in July, which is in line with the central bank’s repo rate path, according to Danske Bank. The message in October may be a copy paste from the previous meeting, but there could be a “slightly more confident tone.”
According to SEB Economist Olle Holmgren, SEB also sees a tightening in December, but expects the Riksbank to leave its signaling unchanged next week, continuing to indicate the same probability of a hike in December or February. But in its “risk” scenario, it sees a 20 percent probability that the bank will signal a greater probability for a December hike.
“Short term, the path should indicate that a rate hike at the end of this year is almost as likely as one early next year. However, we expect the Riksbank to signal that December is the main alternative. This could be announced either verbally in conjunction with the report or in its minutes published on 2 November,” said Nordea Chief Analyst Torbjorn Isaksson.
Handelsbanken Senior Economist Johan Lof said, “Our main scenario is that the rate increase will come in February, but the latest inflation outcome increased the probability of a December hike. It’s likely that the Riksbank will keep the repo rate as well as its communication unchanged in October to have a bit of a wait-and-see period.” Still, it can’t be excluded that the board in October chooses to signal which month is more likely for a rate hike — December or February.