Riksbank Minutes – New Board Composition Could Sway Policy Direction

Summary

• The Riksbank minutes remained mixed. All board members agreed that underlying inflation helped raise the case for a larger-than-forecasted hike, but they disagree on the outlook for monetary policy.
• Ahead, inflation outcomes will likely drive rate decisions. However, with a new Governor and Deputy Governor at the next meeting, the outlook is muddied.
• Overall, the members’ minutes read:
  • First Deputy Governor Anna Bremann: Dovish.
  • Deputy Governor Henry Ohlsson: Hawkish.
  • Deputy Governor Per Jansson: Hawkish.
  • Deputy Governor Martin Flodén: Neutral/dovish.

Implications

• We still expect a 25bp Riksbank hike in February 2023, but risks are firmly tilted toward 50bp.

November Meeting

The Riksbank hiked its policy rate by 75bp to 2.50% at the 23 November meeting, following a unanimous vote. Looking ahead, the forecasted policy rate was revised higher, indicating at least a 25bp hike in February. Lastly, it was Stefan Invges’ last monetary policy meeting as Governor – Erik Thedéen will take over – while Aino Bunge will be part of the decision-making process as a Deputy Governor. Read our review here.

In this note, we analyse the November meeting minutes.

Digesting Board Member Comments

Deputy Governor Per Jansson

Hawkish

Work done so far has been ‘just about right’. He claims the Riksbank have been ‘Cautious’. However, there is great uncertainty surrounding how much tighter monetary policy needs to become. He chooses to compare both historic and international examples. Both show ‘the tightening can actually be considered not to be that severe’. Going forward, ‘a number of rather favourable forecast assumptions also need to hold’ for inflation to return to target.

Deputy Governor Martin Flodén

Neutral/Dovish

While the decision to hike by 75bp was unanimous on paper, it was not that straightforward. Deputy Governor Flodén had considered sticking to script, hiking by the forecasted 50bp given that work so far ‘is having the intended effect’. However, he was ultimately swayed by ‘substantially higher’ underlying inflation that was ‘not explained by any specific temporary component. That is, it was a broad-based beat in underlying inflation. Going forward, if inflation expectations remain at bay, underlying CPIF turns back towards target, electricity prices do not spike, and household consumption continues to dwindle, ‘it may be appropriate to hold the policy rate unchanged at the next meeting.’

Deputy Governor Henry Ohlsson

Hawkish

Deputy Governor Henry Ohlsson is, by far, the most hawkish of the four. It is very clear to him that ‘monetary policy needs to become much less expansionary’ and, therefore, it is ‘necessary to raise the policy rate substantially.’ Moreover, he believes that the 75bp hike may ‘prove to be not quite enough.’ He admitted he would have voted for a 1pp hike if other board members had favoured the move.

There is nothing wrong with being comparatively hawkish. Dominique, for example, argues the Federal Reserve may need to hike to 8% based on economic theory and a rigorous view on US data. The same cannot be said for Ohlsson. When asked why he does not agree with the forecast, he replied ‘I make an overall assessment and do not believe that CPIF inflation will come down to 2 per cent in 2024. However, I have not dissected the individual contributions in detail.’ That is, he does not have a rigorous view on inflation, despite it being his job. Scary!

Deputy Governor Anna Breman

Dovish

First Deputy Governor Anna Breman turned more dovish at the last meeting – read our review of last meetings minutes here. Her dovish stance has continued. As of the November meeting, she views monetary policy as ‘firmly contractionary’. And, even though ‘inflation is not falling back more rapidly’, it ‘does not mean that monetary policy is not effective’. Instead, it reflects the lag between delivery and effect. Looking forward, the Riksbank ‘are approaching a level at which the policy rate can then be held unchanged for a time’. In her eyes, she believes that the Swedish economy is more sensitive to increases in interest rates. Therefore, she envisages a lower terminal rate that would be left unchanged for longer than if they hiked to, say, 3% or higher.

Bottom Line

The board remained split. Going forward, the current members look to remain data dependent, though there is little knowledge on the inclination of joining members. They could stir the decision either way.

We expect the Riksbank to hike the policy rate by 25bp to 2.75% in February. However, risks are tilted toward a larger-than-forecasted 50bp hike.

Ben Ford is a Researcher at Macro Hive. Ben 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.

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