Riksbanken U-Turn Stokes Sweden Interest rate hike suspension: Decision guide
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The Riksbank may be about to implement one of the most dramatic monetary policy changes since Stefan Ingves first took over the Central Bank of Sweden in 2006.
Less than three months since its officials departed from the tightening trend of global counterparts by effectively ruling out rate hikes before 2024, investors are ready for just such a move to take place on Thursday.
Economists are less convinced that this will happen, although they expect that no change in this week’s Riksbank decision will be accompanied by a forecast warning of an imminent series of borrowing cost increases to counter inflation.
The central bank’s calm of defiance fell in mid-March, when Governor Ingves acknowledged that an environment with “far too high” price increases meant that interest rates would probably have to rise earlier than previously signaled. Subsequently, three more officials publicly acknowledged the need to change course.
– This is about showing that they take price increases seriously, says Thomas Pohjanen, who manages the hedge fund Excalibur Fixed Income. “My interpretation of the comments from the Riksbank’s board members is that they feel it is better to start walking soon, accept that they were wrong in February and tear off the patch.”
Pohjanen believes that it is likely that the Riksbank will choose to raise already this week, but acknowledges that it is a close conversation. Overall, investors price almost an increase of as much as 25 basis points on Thursday from the current policy rate level to zero. However, only 2 out of 18 economists surveyed by Bloomberg expect such a step so soon.
Whatever the Riksbank does with its policy rate this week, everyone’s eyes will be on what it says about increases in the future. Market pricing indicates that it may start a series of nine or ten increases, which will bring borrowing costs to their highest level in almost 14 years.
While Ingves recently said that it would be feasible to raise the policy rate to 2.5 per cent, economists question whether the Riksbank is willing to risk the impact on the country’s indebted households that such a change would entail.
– The economic effects of such aggressive increases can be dramatic, says Svenska Handelsbanken’s Johan Lof. “We still see a migration rate that is more in line with the Riksbank’s announcement of a gradual tightening of monetary policy than what is priced in by the market.”
For now, the Riksbank’s challenge for inflation is pressing. The central bank’s target, the CPIF, rose to 6.1% in March. Much of it is driven by higher costs for fuel, electricity and supply shortages, factors that make it unlikely that the 2% target will be reached in the coming months.
Some observers claim that the central bank’s U-turn is hasty. Alexander Onica, portfolio manager at Skandia Investment Management, believes that since inflation is largely due to factors beyond the Riksbank’s control, the only thing a rapid change in policy can do now is to curb prices by slowing down the economy.
“The fact that an institution of that size and scope is making such a move only underscores that they have no responsibility,” he said. “Oil prices are controlling, and when central banks try to control oil prices by using policy rates, there is a risk that it will not end well.”
(Corrections to show Pohjanen expects interest rate hike in April in the sixth paragraph.)
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