The Riksbank delivered another half-point hike in borrowing costs and pledged one more salvo, with the dovish outlook slamming the krona.
(Bloomberg) — The Riksbank delivered another half-point hike in borrowing costs and pledged one more salvo, with the dovish outlook slamming the krona.
Two officials opposed the move by the Swedish central bank to raise the interest rate to 3.5%, favoring a smaller quarter-point step. The size of Wednesday’s hike was widely anticipated by economists after underlying price growth exceeded the Riksbank’s forecasts.
The executive board led by Governor Erik Thedeen expects to raise borrowing costs once more, delivering a quarter-point increase either in June or in September.
With the prospect of hiking nearing a peak, Sweden’s krona fell by as much as 1% to 11.4280 per euro after the decision, the biggest drop in more than a month.
“Unusually large rate hikes, the 50s and 75s, are taken off the table,” Svenska Handelsbanken AB’s senior economist Johan Lof said in a note to clients, cutting his forecasts for a June hike to 25 basis points. “It is now clear that the Executive Board of the Riksbank is more patient and comfortable with the outlook and the risks – even writing a scenario about lower-than-expected inflation.”
The Riksbank faces a trade-off more acute than many advanced-world peers as it struggles to tame inflation while its monetary tightening so far already shows signs of hurting economic growth. Sweden’s highly indebted household sector with mortgage rates fixed on short terms has meant that increases borrowing costs have had a rapid impact on spending power.
The central bank is also confronting a weakened krona that is exacerbating its challenge by importing inflation. After having started to sell bonds in an attempt at shoring up the currency, the Riksbank on Wednesday reiterated that strengthening would be helpful.
“We believe in, and desire, a stronger krona,” Thedeen told reporters in Stockholm. “There are strong arguments in favor of krona strengthening, including Sweden’s trade surplus, stable government finances, and its well-functioning, competitive economy.”
Inflation remains uncomfortably high, at 8% on the measure targeted by the central bank — four times the goal of officials. Underlying price growth, stripping out energy costs and the effect of rate hikes, is even higher. That gauge has begun slowing however for the first time in more than a year.
“There could possibly be a stabilization at a very high level of underlying price increases, but we see no clear turnaround in inflation,” Thedeen said.
Another sign of encouragement was a benchmark wage deal signed earlier this month. While yielding the biggest pay increases in decades, its two-year duration reduces the risk that another round of negotiations between labor unions and employers might start before the Riksbank can potentially get inflation back toward its 2% target.
Such agreements “contribute to reducing the risk of a wage-price spiral,” the central bank said. “However, the settlement includes a clear expectation that the Riksbank will continue to adjust monetary policy to bring down inflation in the fairly near future.”
The more benign outlook for pay emboldened Anna Breman and Martin Floden, two policymakers, to favor a smaller rate move.
“Against the backdrop of well-anchored inflation expectations, the moderate wage increases and the weak and downward-revised forecast for domestic demand, they argued that the monetary policy tightening should now proceed gradually,” the Riksbank said.
The rate path now shows a peak of 3.65% from the second quarter of next year through same quarter of 2025, before an expected decline.
The biggest Nordic economy has shown some resilience to the central bank’s drastic tightening of more than 300 basis points in 12 months. While that has weighed on house prices and construction activity, data due on Thursday might yet show that Sweden narrowly escaped a technical recession in the first quarter.
Worse may be still to come, however. The OECD predicts that Sweden will see the deepest contraction in the European Union this year, and Stockholm-based Swedbank warned on Tuesday that the country is facing another “tough year” with anemic growth in 2024.
“The Swedish krona has enjoyed a window of relative strength since the February Riksbank meeting but this window looks to be closing,” Namik Immelback, chief macro strategist with SEB AB, said in an emailed note, adding the Riksbank “underwhelmed” on Wednesday. He said krona strengthening requires a more hawkish Riksbank that doesn’t solely rely on rate hikes, as well as disinflation and a more robust global risk sentiment.
–With assistance from Love Liman, Ott Ummelas, Gina Turner and Joel Rinneby.
(Updates with Thedeen’s comments from 8th paragraph.)
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