BNY Mellon

Riksbank to Get More Aggressive

The Federal Reserve is not the only G10 central bank with the potential to hike 100bp this week. Considering the length of time since the last central bank decisions in Sweden and Switzerland, and the widening in policy gaps since, arguably 100bp hikes are needed in those two countries just to keep up with the European Central Bank, let alone the Fed.

The Riksbank’s signal has certainly been strong enough but the market, perhaps scarred by the structural depreciation of the krona in recent years, is not biting. Since Deputy Governor Floden’s remarks in late August calling the SEK “way too weak”, the currency has lost between 1.5% and 2.0% against the US dollar and the euro. Even after this week’s upside surprise in inflation figures, the currency has failed to rally against major peers.

We think this raises the stakes for today’s meeting, with the Riksbank needing to move 75bp simply to meet expectations. But the message on terminal rates will just be as important to anchor the currency, in our view. The dollar’s renewed vigour has been attributed to the ‘higher for longer' narrative around the Fed. However, for most of the Fed’s peers, the feeling remains one of expectations of easing as soon as inflation numbers permit – a stance which fails to taken into account the entrenched nature of supply issues driving inflation.

In its June MPR, the Riksbank foresaw aggressive tightening through 2022-2023 towards 2%, before holding around there through 2026. While easing is not on the horizon, 2% is hardly restrictive when it comes to managing inflation, which by the Riksbank’s own admission is at increasing risk of “becoming entrenched in price- and wage-setting”.

If the Riksbank is hoping for any currency relief to help with marginal tightening in financial conditions, the past three months have not been helpful. On rate differentials alone, the Riksbank risks falling behind peers, and this has contributed to the KIX import price index (the Riksbank’s preferred nominal exchange rate measure) rising to 122, above the average estimate of 120 through most of 2022 and 2023. As “global market prices” is one of the main reasons the Riksbank cites as driving inflation, it means these risks have only intensified through the summer. Consequently, limiting further SEK weakness is almost a necessary condition to prevent upside inflation surprises from the import channel.