Sweden: Riksbank keeps rate in negative territory and expands bond-buying stimulus
July 1, 2015
At its monetary policy meeting on 1 July, the Central Bank (Riksbank) decided to cut the repo rate from minus 0.25% to minus 0.35% and extend the purchases of government bonds by SEK 45 billion. The Bank introduced negative interest rates for the first time ever in February and made a further cut to the current level in March to counteract persistently-weak inflationary pressures. The Bank’s decision to cut the repo rate and expand its bond purchasing program comes as inflationary pressures are gradually pick up, indicating that the unconventional policy approach employed by the Bank is having an effect.
In its accompanying statement, the Bank explained that uncertainty surrounding external factors, particularly the developments regarding the Greek sovereign debt crisis, call for a more accommodative monetary stance to ensure that inflationary pressures do not abate. The Bank also stated that the krona had appreciated more than expected against other currencies, thereby fueling concerns over its effect on the prices of imported goods and posing a risk to the gradual upturn in inflation. The Bank noted that, although it is necessary for policy to be accommodative at this time, measures must be taken to ensure that current household debt levels do not expand and create imbalances in the economy. To this end, the government and authorities must act to reduce household debt levels and remain vigilant in the face of such risks.
In addition to cutting the repo rate, the Bank also extended its bond purchasing program that was introduced in February to further stimulate inflation in the economy. The purchases decided upon at the last monetary policy meeting, which took place in April, will conclude in September, after which the new round of purchases will come into effect. The SEK 45 billion extension brings the total value of the unprecedented program to SEK 135 billion.
Finally, Riksbank reiterated that it is fully committed to ensuring that inflation rises and that it is prepared to make further moves if necessary. This includes the possibility of additional rate cuts and an extension of government bond purchases. Moreover, the Bank stated that, “the purchase of other types of securities and the launch of a company lending program via the banks may also come into question.”
Author: Carl Kelly, Economist