The Bank of Japan wasn’t the only central bank to surprise markets Thursday.
Although the BoJ’s strengthened commitment to capping 10-year JGB yields and the attendant slide in the yen grabbed all the headlines, it’s worth noting that Sweden executed a policy U-Turn.
The Riksbank hiked rates 25bps (figure below), unveiled plans to shrink its balance sheet and shifted its projections dramatically.
“Inflation has risen to the highest level since the 1990s and will be high for some time,” the new statement said, citing the necessity of “counteracting” a wage-price spiral in explaining Thursday’s hike and what the Board expects to be “gradual” additional increases “going forward.”
The bank was straightforward. Although 2021’s price pressures were explained by reference to “rapidly” rising energy costs, the Riksbank said that in 2022, inflation “outcomes indicate the upturn is now broad and prices of goods and food as well as services are rising unusually quickly.”
That, apparently, isn’t something policymakers are prepared to countenance. In addition to Thursday’s hike, the bank intends to raise rates “two to three” more times this year. Suffice to say the April repo rate trajectory isn’t comparable to February’s forecasts.
One analyst described Thursday as “a record-large hawkish policy pivot” indicative of the bank’s willingness to “throw the economy under the bus.”
I’m not sure I’d put it quite that way, but I suppose a little hyperbole never hurt anyone when all that’s at stake is Riksbank tasseography. The simple figure (below) illustrates the problem.
The bank will start letting the balance sheet run down in the second half of the year by halving reinvestments of maturing assets. Bill-buying will “cease,” effective immediately.
“With this monetary policy, inflation is expected to fall back next year and be close to 2% from 2024,” the statement said.
That might be optimistic, but I’ll say one thing for the Riksbank: They offered a concise assessment of the vexing quandary facing policymakers in all developed economies this year.
“Monetary policy cannot affect the high international commodity and shipping prices,” the bank said, adding that,
It is therefore inevitable that the rate of increase in consumer prices of, for example, energy, food and certain other goods will remain high for some time yet. However, the Riksbank can conduct monetary policy to counteract the high inflation becoming entrenched in price-setting and wage-formation, and ensure that inflation returns to the target after some time.
Analysts suggested that was evidence the bank will “do what it has to do” to bring down inflation.
The real message is that the Riksbank will do what it can.
Countries that actually have a safety net have more political room to raise rates…..