Sveriges Riksbank kept the policy rate unchanged today (February 14) as GDP growth and increases in wages proved somewhat slower than expected and inflation forecasts declined.
The executive board of the Swedish central bank believes the economy still demands an expansionary monetary policy in order for inflation to remain close to the target of 2% annual growth in the consumer price index at fixed interest rates (CPIF). As a result, it left the repo rate unchanged at –0.5%.
However, delaying the hike has created divisions in the six-member executive board, as the US Federal Reserve, the Bank of Canada and the Bank of England have raised rates and the economy continues to grow. Deputy governor Henry Ohlsson dissented from the majority and argued in favour of raising the repo rate 25 basis points to –0.25%.
“Against a strong macro backdrop, even the doves now feel that the Riksbank can become less ECB-focused and can move ahead of the ECB,” say Georgi Deyanov and Pasquale Diana, analysts at Morgan Stanley.
Dissent may become more pronounced in the months to come, as rate-setters have introduced a subtle modification to the wording in the monetary policy report, indicating the hike could come later than expected. Now the first raise is expected “during the second half of the year”, while in December it was scheduled “in mid-2018”.
Difficulties in increasing inflation and inflation expectations are the main reason to be cautious about policy normalisation, the central bank says. CPIF came in at 1.9% in December 2017 and the Riksbank has cut inflation forecasts to 1.8% in 2018 and 1.9% in 2019, from 2% in both years at its previous meeting.
Today’s inaction increases the importance of the policy decision due on April 26, which represents the last moment for policymakers to indicate a delay in the first rate hike. Afterwards, rate-setters would enter the second half of the year without a clear indication of when they intend to initiate the tightening cycle.
“Even if we assume that the Riksbank does hike ahead of the ECB, the issue is one of timing,” Deyanov and Diana say. “In our view, caution would still suggest that the Riksbank will eventually choose to delay its normalisation by a few months at least.”