Sweden: Riksbank maintains negative repo rate and bond-buying stimulus
September 3, 2015
At its 2 September monetary policy meeting, the Central Bank (Riksbank) decided to maintain its repo rate at its current unprecedented-low of minus 0.35%. The Bank also left its bond buying program schedule unchanged at SEK 45 billion worth of government bond purchases through the end of the year. 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 leave the repo rate and its bond purchasing program unchanged comes as inflationary pressures are gradually picking up, indicating that the unconventional policy approach employed by the Bank may be having an effect.
In its accompanying statement, Riksbank noted that the global economy is improving, supported by growth in the US, UK and the Euro area. However, other economic developments, including the recent fall in oil prices and volatility in FX and equity markets, are clouding the global growth outlook. In Sweden, monetary policy seems to have boosted inflation in recent months, along with the labor market. Low energy prices are keeping headline inflation low, however the Bank predicts an underlying inflation path consistent with the one laid out in its July monetary policy report.
Riksbank mentioned that external developments still pose significant risks to inflation. Recent volatility in financial markets have clouded the Bank’s outlook somewhat, making it difficult to discern what the value of the currency will be going forward. Persistently-low energy prices also pose a risk to inflation, however, this risk has lessened in comparison to earlier this year. Other areas of concern stem from the accommodative monetary policy, such as the effect low interest rates may have on asset prices or on levels of household indebtedness. As it stands, the Bank is already concerned over the current level of household indebtedness in Sweden. Riksbank stated that it was imperative that the government consider such risks and take policy action to mitigate them, otherwise the economy could be in store for a costly readjustment.
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 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.” The next policy meeting is scheduled to be held on 27 October.
Author: Robert Hill, Economist