As noted in our week ahead preview, the Riksbank faced a rather daunting task headed into today’s rate decision.
Obviously, they have to exercise caution. They’re effectively beholden to whatever the ECB does. As Governor Stefan Ingves told Bloomberg earlier this year, “when you are next to an elephant, you have to be careful.” Simply put: they need to remain as noncommittal as possible until Draghi tips his hand or risk unwanted krona strength that could derail inflation. Meanwhile, they have to keep an eye on the housing bubble.
“The Swedish krona is the strongest G-10 performer in 2017, and policy makers will not want to add fuel to this by taking a hawkish stance at today’s rate announcement,” Bloomberg’s Richard Jones wrote this morning.
“The Riksbank has been fighting krona strength for several years now and if they were to even hint at tightening, the krona would take off,” Nordea’s Torbjorn Isaksson noted earlier, underscoring that point.
Well, they kept rates unchanged at minus 0.50% Thursday and they’re shamelessly clinging to the inflation excuse. To wit:
Monetary policy needs to remain expansionary for inflation to continue to be close to 2%. The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at minus 0.50% and is expecting, as before, not to raise it until the middle of 2018.
Why is that funny? Well, because inflation has been doing pretty well. “The July inflation surprise was the fourth consecutive upside surprise relative to the Riksbank’s expectations,” Goldman reminds you in their post-mortem.
Again, this is all about the krona. “It’s certainly a concern of ours,” Ingves said dryly a few hours ago.
Put simply: they are hamstrung. If Draghi doesn’t move, they can’t move and if they do, the krona would appreciate rapidly, jeopardizing the gains they’ve made on inflation. Of course in the meantime, loose monetary conditions have created a housing bubble.
Not everyone is amused with this charade. Take SEB chief economist Robert Bergqvist for instance, who said this on Twitter after the decision:
ðŸ‡¸ðŸ‡ªSorry – but it's crazy to have -0.5% when you have this inflation outcome (from Riksbank's Monetary Policy Report incl new variation band) pic.twitter.com/3jYBr2tNp0
— Robert Bergqvist (@BergqvistRobert) September 7, 2017
Well, “sorry” Robert, but the Riksbank is worried about the damn krona and until Mario Draghi moves definitively in the direction of tightening, there’s just not much Ingves can do.
“Krona has appreciated faster than in [our] July forecast and while it’s reasonable to expect krona to appreciate due to the strong economy, it’s important that it doesn’t strengthen too rapidly,” Ingves said at the press conference, before stating the obvious as follows: “There are risks if Riksbank makes policy less expansionary before other, larger central banks.”
And so, mission accomplished for now as the krona fell to a one-week low versus the euro:
“The Riksbank did not show data dependency by keeping its repo rate path unchanged despite revising its medium-term inflation forecast somewhat higher,” Goldman emphasizes.
And that’s the irony here. This is the policymakers’ paradox in a world where everyone is engaged in the same easing effort. Unless everyone involved sees their economies move in the same direction at the same time and at the same pace, any “success” you have is going to immediately make you the “winner” in the eyes of FX markets which will promptly “reward” you for your efforts by driving your currency higher.
That, in turn, is a double pain in the ass. Because in the short-term it puts policymakers in the position of having to explain why things aren’t actually as good as they appear thus necessitating a slower pace of normalization than they would ideally like to see, and in the long-term, if nothing is done, the currency gains end up negating the very economic benefits that served as the rationale for FX markets to choose you as the “winner” in the first place.
Good luck with that.