Riksbank Minutes and Inflation Review

Conclusions are as of the meeting minutes and do not consider follow up commentary released since.

Summary

• The Riksbank meetings proved to be hawkish. All noted the displeasure in core inflation surprises and a weaker krona, as well as stable inflation expectations.
• There was disagreement on how sensitive the economy is to interest rate increases alongside whether the Riksbank should be data-dependent.
• Ahead, three inflation prints, an important business survey and an unfavourable backdrop for the krona will help sway policy. 25bp seems certain; 50bp is highly liked.
• Overall, the members’ minutes read:
  • Governor Eric Thedéen: Hawkishly data-dependent (Lagarde-esque)
  • First Deputy Governor Anna Bremann: Neutral-Dovish
  • Deputy Governor Aino Bunge: Neutral
  • Deputy Governor Per Jansson: Hawkish
  • Deputy Governor Martin Flodén: Neutral-Hawk
  • Deputy Governor Henry Ohlsson: Arch-Hawk

Implications

• We now expect the Riksbank to hike the policy rate by 50bp to 3.5% in April. Another hike in June is possible.

November Meeting

Governor Thedéen’s first meeting proved hawkish. The Riksbank hiked the policy rate by 50bp to 3.0% and put forward plans to sell government bonds from April and to increase the offered issuance of Riksbank Certificates. A hawkish policy path revision and desire for a stronger currency adjoined the decision. Read our review here.

In this note, we analyse the February meeting minutes. You can find our analysis of the November meeting minutes here.

Digesting Board Member Comments

Governor Eric Thedéen (newly elected)

Hawkishly Data-Dependent (Lagarde-esque)

The Governor did not mince his words, another 50bp is on the table for the spring. Going forward, he will be data dependent and ‘attach a little less weight to forecasts, especially those across a longer time horizon.’ Additionally, he will ‘carefully evaluate the actions of neighbouring central banks’ – recall our hawkish call on the Fed and ECB; closely watch krona developments, standing behind strong fundamentals (noting a ‘permanent savings surplus’ versus other countries); and place his faith in the upcoming wage bargaining rounds, which he hopes will prove ‘in line with the inflation target’. Lastly, on QT, he would be up for amending the scheduled plan ‘if market conditions are unfavourable’. Currently, he views it as a ‘normalisation of the holdings’.

We class his first set of minutes as neutral-hawkish. While he points toward further hikes, he could easily be deterred by dovish data outturns.

First Deputy Governor Anna Breman

February: Neutral-Dovish; November: Dovish

While Deputy Governor Breman supported the latest decision, she continued to beat a slightly more dovish drum, overall. Indeed, ‘it takes time for monetary policy to affect inflation.’ Moreover, ‘Monetary policy needs to be significantly contractionary for a considerable period going forward’. That is, fewer hikes, but fewer cuts. Going forward, she expects last year’s hikes to create ‘favourable conditions for inflation to fall during the year’ and wants to balance weaker short-term growth against the gradual return to low and stable inflation.

Elsewhere, she is worried about the krona. Historically, a temporary depreciation of the krona has no significant effect on inflation. However, ‘A continued trend depreciation of the krona can make monetary policy more difficult going forward’.

We downgrade her dovish stance to neutral-dovish; she is worried about the krona. We are bearish the krona, which could help the hawks.

Deputy Governor Aino Bunge (newly elected)

February: Neutral

Deputy Governor Aino Bunge’s first meeting proved measured. She began on a hawkish note; underlying inflation being very high, and that it is a situation they must continue to take very seriously, with confidence in the inflation target earned, not taken for granted. Then she moved to more neutral ground, considering the considerable hikes already delivered and the trade-off with the real economy. She finished on a dovish angle, worrying that housing could fall further than expected as the increased levels of indebtedness and rate sensitivity are set against an unknown allocation of savings.

Her first set of minutes were balanced. Considerations were given to both hawkish and dovish arguments with little additional colour provided.

Deputy Governor Per Jansson

February: Hawkish; November: Hawkish

He has toned down his hawkish November stance. The Deputy Governor pointed toward ‘a number of factors that have deepened my concern’ regarding its future, despite it only proving a marginal beat versus forecast. Notably, pricing intentions within the Economic Tendency Survey remain extremely high. He also highlighted the risk of a wage-price spiral.

Going forward and in the spirit of our tamed assessment, he described the forecasted policy rate at ‘just over 3.3 per cent as a quarterly average’, perhaps opening the door to two 25bp hikes. Though, this assessment would seem counterintuitive to the delayed ‘shift in focus’ from smaller hikes; 50bp is on the table.

Lastly, he accepts a hard landing is forthcoming, unlike Breman and Bunge. He agrees on their worry for a weaker krona.

Deputy Governor Jansson has retreated from his arch-hawk pedestal, but remains hawkish.

Deputy Governor Martin Flodén

February: Neutral-Hawk; February: Neutral-Dovish

Deputy Governor Flodén appears to have changed his tune. This time he appeared a touch more hawkish, in contrast to his neutral-dovish outing in November. In his eyes, there has been a limited impact of the real economic slowdown on the development of inflation while the impact of the krona, this time, appears more than minimal. That is, a weaker krona could be inflationary. Going forward, he wants to see the krona sideways, at a minimum.

He decided to take a different tack from others on interest-rate sensitivity. Instead, he thinks that Sweden is less interest-rate sensitive than was previously thought (referring to developments of the Sweden FCI).

Of course, he could not leave behind all his dovish attributes. Favouring the positive developments, he discussed lower energy prices, stable inflation expectations and their role in wage formation, and that we may live in a scenario where consumption is reduced but the labour market remains healthy.

Deputy Governor Flodén has turned more hawkish. He expects the policy rate to be raised by 25 or 50bp in April, in line with forecasts. In November, he thought a pause ‘may be appropriate’.

Deputy Governor Henry Ohlsson

February: Arch-Hawk; November: Arch-Hawk

The arch-hawk has gone nowhere: ‘It is very clear to me [Ohlsson] that monetary policy needs to become much less expansionary’ with increases ‘very desirable’ – do note the intentional ‘s’. In December he favoured a 75bp and would have voted for a 1pp move if others had. He likely votes for a 50bp hike in April.

Inflation Leaves Households Sick to the Core

Headline inflation (CPI: +11.7% YoY; CPIF: +9.3% YoY) was likely welcomed by the Riksbank (Table 1). Year-on-year numbers printed weaker-than-forecasted (CPI: +11.8% YoY; CPIF: +9.3% YoY) while month-on-month numbers painted a similar, if not more dramatic, picture (CPI: -1.1% MoM; CPIF: -1.3% MoM). Collapsing electricity prices (-27.4% MoM; -1.6pp contribution to MoM) did the most damage.

However, core inflation (CPIF excluding energy) struck back; 0.5pp higher than forecasted and failing to top (Chart 1). Worryingly for the Riksbank, the stronger print came alongside stronger inflation momentum in housing and services while all other categories snuck above their average ranges (Chart 2).

There’s little we can blame reweighting for, either. It was responsible for 0.5pp of the CPI MoM print and 0.11pp of the CPIF print, according to the SCB.

Summary

Governor Thedéen’s first meeting was hawkish, and the meeting minutes back it up too. Neutral and dovish voices were forced to scale back by surprisingly strong inflation while the hawks hammered the point home. Meanwhile, yesterday morning’s core inflation print proved higher than expected, with momentum on its side. We think a 50bp hike follows in April.

Ben Ford is a Researcher at Macro Hive. Benjamin studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively. 

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)