Swedish Riksbank Executive Board Extends Quantitative Easing

April 21, 2016

Sweden’s negative repo rate was left at -0.50%.  It took seven spaced reductions between December 2011 and October 2014 to cut the policy rate from 2.0% to zero.  Negative rate policy was introduced in February 2015 initially at -0.10%, then lowered by 15 basis points in March 2015, 10 bps in July 2015, and 15 bps in February 2016 to the current level. 

The negative repo rate has been complemented by quantitative easing.  A statement released by the Executive Board of the central bank extends the program of asset purchases into the second half of this year with plans to buy SEK 30 billion of nominal government bonds and SEK 15 billion of inflation-adjusted government bonds.  This purchases will lift the size of the program to SEK 245 billion by the end of the year.

On the economy, the statement is guardedly optimistic.  The Swedish economy is now expanding decently, and officials are projecting GDP growth of 3.7% this year, followed by 2.7% in 2017 and 2.3% in 2018.  CPI inflation is positive and doubled to 0.8% in March from 0.4% in February.  Officials trust that the upward trend in inflation will continue, with baseline projections for total CPI of 1.0% this year, 1.9% in 2017 and 2.9% in 2018.  They project core inflation at 0.7% in 2016, 2.1% next year and 2.9% in 2018. 

But the statement also mentions that uncertainty surrounding the baseline view is high, and the strongest language is reserved for underscoring determination not to allow slippage to occur in the path back to acceptable, positive inflation.  The projected likeliest path of the repo rate goes no higher than the current level this year, reaches only 0.14% in the second quarter of 2018 and is still well below 1% at 0.67% in the second quarter of 2019.  Moreover, officials indicate a readiness to ease further if deemed necessary to ensure continuing progress toward their inflation goal.  A number of ways that policy might be loosened additionally are mentioned:

There is still scope to cut the repo rate further. If necessary, the Riksbank could also adopt measures in the framework for the implementation of monetary policy to support monetary policy. In addition, the asset purchases could be extended. The Riksbank is also prepared to intervene on the foreign exchange market if the krona appreciates so quickly as to threaten the upturn in inflation.

One Executive Board member dissented from today’s extension of quantitative easing into the second half of this year, and that was Cecilia Skingsley.  The next Board policy announcement will be made on July 6.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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