Sweden: Riksbank pushes rate further into negative territory and expands bond-buying stimulus
February 12, 2015
At an unscheduled meeting on 18 March, the Central Bank (Riksbank) decided to cut the repo rate from minus 0.10% to minus 0.25%. The Bank introduced negative interest rates for the first time ever in February to counteract persistently-weak inflationary pressures, and the decision to drive rates further into negative territory enlarges the unprecedented monetary policy experiment.
In its accompanying statement, the Bank explained that, “there are signs that inflation has bottomed out and is beginning to rise, but the recent appreciation of the krona risks breaking this trend.” International economic developments, including the ECB’s large asset purchase program and the looming adjustment of the Federal Reserve’s interest rate policy, have led to significant fluctuations in the fixed income and foreign exchange markets. The Bank recognized that it is hard to determine how the krona will behave in this environment, but an over 4.0% appreciation against the euro in recent weeks sparked concerns that an expected upturn in inflation will falter. The Bank decided to introduce a more expansionary monetary policy in order to boost underlying inflation and ensure that long-term inflation expectations converge toward the 2.0% target.
In addition to cutting the repo rate, the Bank declared that it would expand its bond-purchasing program. At the previous meeting in February, the Bank announced that it would purchase nominal government bonds with maturities from one year up to around five years for a sum of SEK 10 billion (USD 1.2 billion). Now the Bank will purchase, “government bonds for the sum of SEK 30 billion, with maturities of up to 25 years.” These purchases, which will begin on 26 March and are expected to be completed at the beginning of May 2015, are an extension of the purchases made in February and March.
Finally, Riksbank reiterated that it is fully committed to ensuring that inflation rises toward the target and that it is prepared to make further moves without notice.
Author: Carl Kelly, Economist