Riksbank minutes reveal fissures on ‘leaning against the wind' amid low inflation

Minutes from the Riksbank's decision earlier this month to leave its key interest rate unchanged amid undershooting inflation reveal growing fissures between hawks and doves on the bank's executive board.

The Swedish central bank held the repo rate at 0.75% on April 8, citing growing household debt levels. That decision to ‘lean against the wind' was followed by surprisingly weak inflation data for March – prompting Olle Holmgren, an analyst at Swedish bank SEB, to describe governor Stefan Ingves as "the most hawkish" member on the Riksbank's executive board, as it appears "he still thinks that the repo rate should be used to control lending".

Ingves himself sees Swedish monetary policy as "highly expansionary" and economic prospects "bright", according to the minutes. Noting inflation had been "somewhat lower than expected", Ingves said it was expected to rise towards the end of 2014, before reaching the bank's 2% target in late 2015. He added the bank should adopt a "wait-and-see" approach.

Holmgren pointed out that while "most of the board members continue to be concerned over financial stability, asking for more regulatory measures to stem the upturn in household borrowing", the minutes confirm that "inflation is increasingly becoming the main focus for monetary policy".

Martin Floden, one of two on the five-strong board that called for a 0.25% cut in the repo rate, pointed out that inflation had been "well below the target over the last three years", adding the Riksbank "has been surprised several times recently to see that inflation has been lower than the forecast", which has generally been more optimistic than outside estimates.

Carolina Ekholm, the other dissenter, said the proposed repo-rate path, which was lowered during the meeting, still signalled an "unwillingness" to lower the repo rate. She also argued there was a risk the current rate "could be perceived as a floor" – something that other board members vehemently opposed, and one called "the type of argumentation that could give the outside world the impression of an undesirable uncertainty" surrounding monetary policy.

Ekholm also said the reluctance to rely on macro-prudential measures to curb financial imbalances was - according to the minutes - "a little strange given that the repo rate, which as far as can be judged also has a limited and indirect effect, is apparently seen as an appropriate instrument for this purpose".