Riksbank Signals It Won’t Raise Rates Again for a Very Long Time
Riksbank Signals It Won’t Raise Rates Again for a Very Long Time
(Bloomberg) -- Riksbank Governor Stefan Ingves signaled that the bank’s decision to raise its main rate to zero last month won’t be followed by more tightening for a very long time.
According to minutes of the bank’s December meeting, Ingves said he’s even willing to let inflation exceed the bank’s target for a while. That said, he also defended the decision to move to zero after half a decade of negative rates, arguing the current policy provides a better “vantage point.”
The governor said that even if the Swedish economy turns out better and inflation picks up “faster than is assumed in our forecasts,” he would be “in no hurry to raise the repo rate,” according to the minutes published on Wednesday.
“The inflation rate can overshoot the target for a period of time, especially given that inflation has in historical terms more often been under than over the target,” he said. “It is more important that we do not overestimate our capacity for ‘fine tuning.’”
But “the situation is not uncomplicated,” Ingves said. The global economic outlook remains challenging and Swedish economic growth in the third quarter was slower than the Riksbank expected.
Against that backdrop, Ingves said the Riksbank can turn to its quantitative easing program for a flexible response to shifts in the economy.
“Our presence on the bond market gives us an opportunity to quickly raise or lower the rate of purchase if there is need to change our monetary policy,” he said. “In other words, we have a good starting point if we should need to adjust the composition and direction of our monetary policy.”
According to Claes Mahlen, head of trading strategy at Handelsbanken, Ingves seems to prefer more QE. “The threshold to change policy, in either direction, is high we think,” Mahlen said.
Sweden’s central bank has made clear it was determined to end a policy of negative interest rates, bringing relief to its finance industry and providing a test case for counterparts around the world experimenting with subzero borrowing costs.
But the Riksbank, once castigated by Nobel laureate Paul Krugman for what he called a “sadomonetarist” policy of tightening, now faces renewed controversy as it removes some stimulus despite evidence of a slowing economy. Deputy Governors Anna Breman and Per Jansson entered reservations against the latest rate decision.
“There is a risk that a rate rise at present would halt an economic upswing before it had managed to take hold,” Breman said, according to the minutes.
Economists pointed to a perceived dovish shift in the tone of the minutes.
“Seems that the opposition to return to negative rates, if need be, is a little less than commonly perceived,” Mahlen said.
“The Riksbank Hawk-o-Meter turned from completely neutral for the October minutes -- not capturing the clear signals of a December hike -- to mildly dovish for the December minutes, despite the policy rate path pointing to unchanged rates,” NordeaMacroLab said in a tweet.
Key Quotes
- Stefan Ingves: The inflation rate can overshoot the target for a period of time, especially given that inflation has in historical terms more often been under than over the target. It is more important that we do not overestimate our capacity for ‘fine tuning’
- Martin Floden: If inflation should prove to be weaker than in our forecast, it may be necessary to make monetary policy more expansionary
- Cecilia Skingsley: Prior to today’s meeting there is an external discussion among central bank analysts of whether an exit from the negative interest situation is an important reason for raising the repo rate. In my opinion, this is an incorrect assumption
--With assistance from Rafaela Lindeberg, Niclas Rolander, Veronica Ek, Charles Daly, Love Liman and Hanna Hoikkala.
To contact the reporter on this story: Nick Rigillo in Copenhagen at nrigillo@bloomberg.net
To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net
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