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Riksbank split on rates but CPI concern dominates

First deputy Riksbank governor Irma Rosenberg and deputy governor Lars Nyberg had wanted to leave rates unchanged, opting for a wait-and-see approach due to a weakening economic growth backdrop.

But Riksbank governor Stefan Ingves said taking that stance was too risky and could leave inflationary expectations at a high level. Three other executive board members, including the usually hawkish Svante Oberg, were in the camp which voted to raise rates by a quarter-percentage point to 4,25 percent.

The central bank shocked markets on Feb. 13 when it announced the rise in its repo rate a day after its meeting. The market had thought growth concerns would outweigh inflation risks for the Riksbank.

Given those growth worries, analysts were little surprised to find policy-makers had been divided. But they noted the overall report suggested the Riksbank’s resolve to combat price growth was steely.

‘They were quite in tune with each other in regard to the outlook, but they have differed when it comes to the timing,’ said Cecilia Skingsley, economist at Swedbank.

Swedish markets were stable after the news. The crown at 1020 GMT was at 9.2980 per euro, little changed from before the minutes. Two- and 10-year bond yields were similarly steady.

Not so dovish

The Riksbank said when it raised rates that it was likely to hold borrowing costs stable for the rest of the year.

But in a Reuters poll just after the move, half of 16 economists surveyed thought there would be rate cuts in the coming year.

The minutes poured cold water on this view. ‘There were two who opposed the hike, but if you look to how they phrased themselves, you can see that they very much want to have the chance to raise later on,’ said Alf Riple, economist at Nordea. ‘So they are not hugely dovish.’

Riple said the market would see this as a sign that rates will not be lowered for some time.

The minutes said Rosenberg believed weakening international growth argued for unchanged rates.

‘However, given the high inflation expectations, Ms. Rosenberg did not want to entirely rule out the possibility that the interest rate would need to be raised in the future,’ the minutes said.

‘Ms. Rosenberg emphasised that an unchanged repo rate should not be regarded as an expression that the inflation target is being given lower priority.’

The market was taken aback by the rate move itself, which sent two-year bond yields surging 20 basis points. But what has become clear since then is the degree to which policy-makers want to stamp out inflation risks.

‘It seems to me that all the members mention higher inflation expeactions as a concern,’ said Danske Markets economist Michael Bostrom. ‘The difference is ... that the dissenters pay more attention to the downside risks.’

Governor Ingves said information since the previous meeting may give cause for concern on inflation.

‘The Riksbank inflation target means that...the repo rate now needs to be raised,’ the minutes said in a section on Ingves. ‘It is too risky to ’wait and see’ what happens with inflation.’