Sweden Monetary Policy

Sweden

Sweden: Riksbank expands bond buying program

October 28, 2015

At its 27 October monetary policy meeting, the Swedish Central Bank (Riksbank) decided to expand its bond-buying program in an effort safeguard the nascent recovery of inflation. Sweden’s monetary sector has been characterized by anemic inflation over the past two years, and the Riksbank has resorted to unorthodox policy measures in an effort to bring inflation closer to its 2.0% target. The quantitative-easing stimulus program was boosted by SEK 65 billion (USD 7.6 billion) so the total amount of government bond purchases will amount to SEK 200 billion by the end of June 2016. The move comes as the krona faces upward pressure from a number of external sources. The Riksbank decided to keep the repo rate unchanged at minus 0.35%.

The Riksbank initiated its bond-buying program in February of this year, and has subsequently expanded it four times, with October’s increase being the most substantial. In its accompanying statement, the Bank cited global uncertainty as the leading factor behind the decision as concerns over the value of the krona mount. Recent events such as postponed rate hikes in the U.S., further stimulus from the ECB, and the global-low-interest rate environment have put upward pressure on the currency, which in turn, has put downward pressure on prices, jeopardizing Riksbank’s efforts to boost inflation. The Riksbank explained that due to these external developments, it had revised downward its inflation forecasts and deems further expansionary policy as appropriate.

At home, investment in the housing sector has been an important driving factor in overall economic growth, however, the overleveraged sector also presents a substantial downside risk to the economy. Low interest rates have promoted borrowing and increased household indebtedness. Riksbank stressed that further action by regulators is needed to deter households from taking on more debt. The Bank is also taking into account the recent influx of migrants. It noted that it was difficult to fully assess what the impact of increased migration flows would be, but that it expects that immigration will have a positive impact on the economy via increased consumption, a reduced dependency burden and an expansion of the labor force.

Finally, Riksbank reiterated that it is fully committed to ensuring that inflation rises closer to its 2.0% target and that it is prepared to make further moves if necessary. This includes the increased likelihood of additional rate cuts and an extension of government bond purchases. Moreover, the Bank stated that it is, “ready to intervene on the foreign exchange market if the upturn in inflation should be threatened as the result of a problematic market development.” The next policy meeting is scheduled to be held on 14 December.

The Riskabnk changed the stance of its forward guidance, and has revised downward it’s the repo rate path. The path is a forecast made by the bank regarding its main policy rate and not a promise, however the shift does increase the likelihood of further rate cuts in 2016. The Bank now sees itself bringing the repo rate back into positive territory in H1 2017. FocusEconomics Consensus Forecast panelists see the repo rate at minus 0.34% in 2015 and at plus 0.01% in 2016.


Author:, Economist

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Sweden Monetary Policy October 2015 0

Note: Riksbank Repo Rate in %, eop.
Source: Riksbank.


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