Sweden: Riksbank maintains policy rate in December as board members disagree over quantitative easing
December 21, 2016
At its 20 December monetary policy meeting, the Riksbank decided to hold its repo rate at a record low of minus 0.50%, as expected by the market. The decision to keep the repo rate unchanged came on the back of recent disappointing economic growth and lower than expected price pressures. Central Bank governor Stefan Ingves announced that, given the risks that could jeopardize the upturn in inflation, there is greater probability of a further cut in 2017 than of a reversal to a more tight policy. Rates are not expected to be raised until the beginning of 2018.
The outlook for economic activity in Sweden and abroad has improved since the assessment the Bank made last October. The international recovery is expected to continue in the coming years and global inflation is expected to rise from low levels. However, the bank stated that inflation was lower than expected in recent months and it is uncertain how and when it will start to pick up more quickly.
The Riksbank confirmed the continuation of its quantitative easing program and decided to extend purchases of government bonds by SEK 30 billion in the first half of next year. At the end of H1 2017 the bonds purchased by the Riksbank will total SEK 275 billion—excluding reinvestments—as planned earlier this year. This decision was not unanimous and three of the six members of the executive board were against the expansion of the bond purchases program given the improvement in the economic environment. Deputy governors Henry Ohlsson and Cecilia Skingsley considered that the bond purchases should have stopped immediately, while Martin Flodén advocated an increment of only SEK 15 billion. The disagreement forced governor Stefan Ingves to use his tie-breaking vote to expand the asset purchase program.
Despite the Bank’s announcement that it will not increase rates until the beginning of 2018, the board’s split vote triggered an immediate appreciation of the krona on expectations of a possible increase before 2018. The Riksbank said that it is ready to intervene in the FX market if this becomes necessary. The next policy meeting is scheduled for 14 February.
Author: Andrea Vetrugno, Economist