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Sweden Monetary Policy November 2020

Sweden: Riksbank holds rates unchanged in November; extends asset purchases

At its meeting on 26 November, the Riksbank kept its monetary policy unchanged, holding its key repo rate at 0.00% while expanding and extending its asset purchasing program.

The decision came amid a more pessimistic outlook, with the Bank noting that “the autumn’s new wave of infections and stricter general guidelines mean that activity in some parts of the economy is showing a downturn again”. Furthermore, the Riksbank commented that “the negative effects on the labor market are expected to last for a long time; at the end of the forecast period [end-2024], the employment rate is still expected to be lower than prior to the crisis”. As such, the Bank saw it necessary to maintain its accommodative stance and continue providing liquidity to bolster the gradual recovery in the economy.

To this end, the Bank expanded its asset purchase program by SEK 200 billion, taking the total nominal amount to SEK 700 billion. Furthermore, it decided to accelerate the pace of purchases during Q1 2021, and extended the scope of the program to include municipal green bonds, treasury bills and sovereign debt—adding to the government, municipal and standard mortgage bonds already being purchased under the scheme. Pushing its environmental credentials a step further, the Board also stated that it “will only offer to buy corporate bonds issued by companies deemed to comply with international standards and norms for sustainability”. As of 20 November, the Bank had purchased a total of SEK 266 billion under the program, which is now set to run until 31 December 2021.

Meanwhile, the Bank downgraded its GDP projections for 2020 and 2021, in line with its more pessimistic stance. As such, it now expects GDP to contract 4.0% in 2020, down from a 3.6% fall estimated in the September report. Likewise, it revised down its growth forecast for 2021 to 2.6% from 3.7% in September’s estimate. Inflation expectations also inched down in the short term, with the CPIF forecast decreasing to 0.4% for 2020 (September report: 0.5%). For 2021, the Bank sees the CPIF at 0.9% (September report: 1.2%).

Looking ahead, the Riksbank reiterated its dovish stance in its communiqué, stating that it “is prepared to continue to use the tools at its disposal to provide support to the economy and inflation”, and that “the repo rate can also be cut if this is assessed to be an effective measure, particularly if confidence in the inflation target were to be threatened”.

Reflecting on the outlook for the repo rate, Knut Hallberg and Robin Ahlén, analysts at Swedbank, commented:

“We do not expect any further changes to monetary policy in the near term and we maintain our call for an unchanged repo rate at 0% in 2020-22. A rate cut may still become relevant at a later stage if inflation remains stubbornly low and inflation expectations start trending lower.”

This is a view shared by Christian Schnittker and Alexandre Stott, economists at Goldman Sachs, who commented:

“Looking ahead we expect the Riksbank to remain on hold and keep its other policy levers unchanged for some time to come.” 

The next monetary policy announcement will be published on 10 February 2021.

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