Articles
10 January 2018

Riksbank divided and still waiting for ECB

The minutes show the committee is becoming a little less dovish and more divided. But the timing of a first rate hike remains unclear and will largely depend on the ECB's next move

100118-image-Sweden.jpg
Shutterstock
In this article

Overall, the Riksbank minutes paint a fairly optimistic picture of the economic outlook in Sweden. Growth remains solid, inflation has returned to target, and the global upswing underway should provide a tailwind for the Swedish economy in 2018. The only cloud on the horizon is the sharp fall in the housing market this autumn, and even that cloud has a silver lining in the Riksbank’s view. The housing correction now, while the macroeconomic environment is benign, reduces the risk of a more damaging fall later in the economic cycle.

That means it is natural for the Riksbank to start moving towards a tighter policy stance. The decision in December to end the QE programme was the first step in that direction, although the reinvestment policy adopted means the Riksbank’s balance sheet will continue to expand in 2018. But the minutes from the December meeting show the committee is becoming more divided, with policymakers falling into three camps:

  • The three hawkish members (Ohlsson, Floden, and Skingsley) opposed the two QE expansions in 2017. Both Ohlsson and Floden voted against the reinvestment decision in December as well, arguing the effect is actually to increase monetary stimulus, while Skingsley thought the reinvestment policy was the best option to improve conditions on the government bond market. Ohlsson also argued for bringing the interest rate forecast forward and signalled he would advocate rate hikes already this spring.
  • On the other end of the spectrum is Deputy Governor Jansson, who has consistently taken an extremely dovish stance. The minutes show he would have preferred extending QE, and advocated pushing the interest rate forecast back. It seems unlikely he will support an interest rate hike anytime soon.
  • The pivotal members of the committee are Governor Ingves and First Deputy Governor Af Jochnick. Throughout the period of unconventional policy since early 2015, they have taken a cautious approach. The key concern has been to keep policy accommodative to keep the currency from appreciating too rapidly. The minutes suggest they are guardedly becoming more positive, but will likely remain in wait-and-see mode until there is more clarity on the housing market and the timing of ECB’s policy tightening.

Given that Governor Ingves holds the tie-breaking vote when the committee divides three against three, the Riksbank will most likely wait to make its next move until there is more clarity on the ECB’s intentions. That is only likely to come in June. At that point, the key question becomes how far in advance of the ECB the Riksbank is willing to move.

The minutes do not provide a clear answer. But if, as we expect, the ECB extends QE beyond the current end date in September and signals a rate hike only in mid-2019, we think it will be difficult for the Riksbank to stick to its current forecast. A first full hike is expected in Q4 and a smaller probability for the first hike in Q3.

At most, it could dip a toe in the water by increasing the policy rate by 10bps to -0.40%. Should the ECB turn more hawkish by the summer, that may very well open doors for the Riksbank to start hiking sooner as well.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).