Sweden’s central bank has announced it will retain its QE policy of buying government bonds and a negative repo rate of -0.5% in the face of economic uncertainty.
Sveriges Riksbank’s Executive Board said it would purchase government bonds through the first six months of 2017. And it stated that “there is still a greater probability that the [repo] rate will be cut than that it will be raised in the near term.”
“Increases in the repo rate are not expected to begin until the beginning of 2018.”
The bank was upbeat in its assessment of the improvements seen both in the Swedish economy – since it’s QE stance of keeping local interest rates low have stimulated the economy – as well as the broader expectations of rising inflation globally and locally towards its own 2% target.
However, it warned that there are threats to its objective of pushing up inflation locally, some of which are definitely out of its own control.
“Inflation has been lower than expected in recent months, and it is still uncertain how quickly it will rise going forward. It is difficult to know, for instance, how the krona exchange rate will develop in an environment where the ECB has extended its asset purchase programme and the Federal Reserve has raised its policy rate. The Riksbank assesses that the krona will strengthen slowly in the period ahead. An overly rapid appreciation of the krona could dampen import prices and the demand for Swedish exports and make it more difficult to bring up inflation.”
“Monetary policy needs to remain very expansionary for inflation to rise towards 2%.”
On its current projections, the repo rate is not expected to go positive until 2019. Swedish CPI inflation is expected to be 1.4% in 2017, before rising to 2.2% by 2018.
The mixed messages are also reflected in the immediate analysis of the statements from the bank by market watchers. Nordea Markets said in its note on the decision that while the Riksbank clearly has signalled the end of its QE purchases of assets, and that the decision to commit to buying more in the first half of next year was delicately weighted given opposition within the Board, it is still the case that it too expects a higher risk of rates being cut further in 2017.
“The strong economy and the limited effectiveness of the tool box are important reasons for this. That said, with the current SEK forecast, there’s a clear risk that the Riksbank will be challenged again early next year. We deem that it is more likely that we will see a rate cut than a rate hike in 2017.”