A Swedish Rate Cut Surprise Just ahead of FOMC Announcement
March 18, 2015
The possible sensitivity of Fed policy to the strength of the dollar acquired even more market interest after Swedish monetary authorities jumped the gun, reducing the Riksbank repo rate after an unscheduled meeting by 15 basis points today and announcing that 30 billion kronor or just under $3.5 billion of long-term government bonds will be purchased by the central bank starting on March 26 and winding up some two months later. A released statement also pledged a “readiness to do more at short notice” so as to “underline that the Riksbank is safeguarding the role of the inflation target as a nominal anchor for price setting and wage formation.” The body of the statement further reveals that krona appreciation against the euro precipitated today’s action that was taken between scheduled meetings on February 12, when the repo was sliced to negative 0.10% from zero, and April 29.
Today’s statement credits monetary policy easing with the recent bottoming out of Swedish inflation but asserts that the recent “large fluctuations on the foreign exchange market create risks for inflation.” To wit, “If the krona continues to strengthen in the near term, this could break off the upturn in inflation that has begun, so that it fails to rise sufficiently quickly. Low inflation over an even longer period of time increases the risk that long-term inflation expectations will fall and that the role of inflation as nominal anchor in price-setting and wage formation will weaken.”
Prior to adopting a negative key interest rate last month, Swedish monetary officials implemented a series of cuts from a high in 2011 of 2.0%.First five 25-basis point reductions were made in December 2011, February, April and December of 2012, and December of 2013. A 50-basis point cut in July 2014 was followed by a cut of 25 basis points last October, which pinned the rate level at zero. This year, like the ECB, Swiss National Bank and Danish National Bank, Sweden has pushed its key interest rate below zero, first to -0.10% and now to -0.25%. The moderate quantitative stimulus to be done is meant to reduce long-term interest rates.
Copyright 2015, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Swedish Riksbank
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