Sweden: Riksbank expands government bond purchasing program to safeguard inflation
April 21, 2016
On 21 April, the Riksbank made good on its promise to loosen its already very accommodative monetary policy stance in order to safeguard the upward trend in inflation. At is April policy meeting, the Riksbank decided that it would hold its repo rate at minus 0.50%. It did, however, decide to expand its government bond purchasing program by SEK 45 billion during the second half of the year. This brings the total amount of bond purchases to SEK 245 billion by the end of 2016. The Riksbank is taking strong measures to ensure that the krona remains weak compared to a basket of other currencies in order to keep upward pressure on the price of imported goods. The decision came hours before a counterpart ECB meeting, in which the ECB decided to hold rates steady, thereby relieving some appreciatory pressure from the krona against the euro.
Inflation has been trending upward since September of last year, although the increases have been modest. The Riksbank does not appear convinced that inflation is on a solid footing and is ready to act should it feel that inflation is in danger of missing its 2.0% target by the end of 2017. Therefore, the Riksbank has made it clear, as it has also done in prior meetings, that it is prepared to do more in order to protect the increase in inflation. Stronger-than-expected GDP growth in Q4 and the ultra-accommodative stance taken by the Riksbanks have fostered stronger inflation expectations in the short run, but longer run forecasts are relatively unchanged from February’s meeting.
Although the Riksbank stated that it is prepared to cut the repo rate further, it is already breaking new ground in terms of experimental monetary policy. Its negative policy rate means that the banks essentially pay the Riksbank for deposits. This is considered a relatively new and untested practice. Via the purchase of government bonds, the Bank hopes to bring down government bond yields, which act as a benchmark for other yields in the economy and drive down the costs of financing for banks and other business. This puts downward pressure on the krona by making krona-denominated assets less attractive.
Authorities at the Riksbank made their decision hours before their counterparts at the ECB made theirs. Any further easing on the part of the ECB would have strengthened the krona relative to the euro, which is what the Riksbank is desperately trying to avoid. By adding a further SEK 45 billion to the government securities purchasing program, the Riksbank essentially ensured that the krona will remain competitive relative against the euro, no matter what the outcome of the ECB’s decision was. This move helped to reassure markets that the Riskbank was committed to raising inflation, despite it being consistently below target for the past five years.
The Riksbank is operating in unchartered territory, yet any serious negative consequences for the economy have been avoided so far. As usual, the Riksbank stated that it is, “highly prepared to make monetary policy even more expansionary if necessary, even between the ordinary monetary policy meetings. There is still scope to cut the repo rate further.” This also leaves the door open to further stimulus as well at foreign currency intervention. Indeed, the Bank’s forecasts see the repo rate averaging minus 0.52% in Q2 2016. The next policy meeting is scheduled for 5 July.
Author: Robert Hill, Economist