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Riksbank Shoot Themselves in the Foot

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Stockholm (HedgeNordic) – The Swedish central bank raised the policy rate by 0.5 percentage points to 3.5 percent amid higher-than-expected underlying inflation during the first months of the year. The Riksbank’s executive board led by Governor Erik Thedeen suggested the hiking process is nearing a peak with one last expected interest hike in June or September, triggering a weakening of the Swedish crown. The Riksbank acknowledges that the weak crown has made its inflation-fighting job more difficult.

“The 50 bp move was expected given the large inflation overshoot that we’ve experienced since the last Riksbank decision in February,” Thomas Pohjanen, the founder and portfolio manager of Excalibur Fixed Income, tells HedgeNordic. “The softer tone accompanying the decision was more puzzling,” he emphasizes. “After all, if the Board is of the opinion that inflation is way too high, therefore landing in a decision to hike by 50 bp, then it’s like shooting yourself in the foot to send a dovish message.” The market reacted by weakening the Swedish krona and sending rates sharply lower, thereby easing financial conditions. “Hardly the outcome an inflation-fighting central bank wishes to see,” considers Pohjanen.

The softer tone accompanying the decision was more puzzling.”

The dovish message was also reflected by two of Riksbank’s five rate-setters having reservations against the interest rate hike of 0.5 percentage points and voting for a smaller hike. “Either the Riksbank knows something more about inflation than the rest of us do, or they believe that inflation will fall sharply during the second and third quarters,” says Lars Kristian Feste, head of fixed income at Ohman Fonder. While CPIF-inflation has fallen in recent months largely due to lower energy prices, disregarding energy prices, inflation has been much higher than expected during the first months of the year, according to the Riksbank.

The Riksbank faces a more difficult trade-off than many of its advanced-world peers, as its efforts to tame inflation by raising borrowing costs affect the spending power of Sweden’s highly indebted household sector with mortgage rates fixed on short terms. “The ultra-short duration of the Swedish households’ mortgages and the high leverage in the commercial property market is a major concern,” argues Fredrik Carlsson, CEO of fixed-income boutique Carlsson Norén Asset Management. Carlsson believes “the Riksbank is done for this cycle” and “the Riksbank has to give credit to the modest wage deals and the balanced budget.” The two-year collective wage agreements signed in the labour market “contribute to reducing the risk of a wage-price spiral,” according to the Riksbank.

“The ultra-short duration of the Swedish households’ mortgages and the high leverage in the commercial property market is a major concern.”

The two-year duration of these agreements reduces the risk of another round of negotiations between labor unions and employers before the Riksbank can potentially get inflation back toward its two percent target. “If inflation is more sticky, coming down but not back to 2 percent, then the central banks will have to maintain a restrictive stance for longer,” concludes Pohjanen.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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