Riksbank Extends Bond Purchases, Interest Rates Unchanged

Dec 22, 12:18 pm
Riksbank_Kronor

Sweden’s central bank announced an increase to its bond purchase program while leaving the benchmark interest rates unchanged, following the conclusion of the monetary policy meeting on Wednesday as the central bank continues to target its policies towards achieving the 2% inflation target rate.

The policy decision, however, showed a split among the executive board as three members dissented, wanting either no further stimulus expansion or a minor tapering of the bond purchases. The division led to the Riksbank governor, Ingves to vote in favor of more QE expansion.

Riksbank announced that it would increase the bond purchases target by 30 billion SEK to 275 billion SEK by end of June 2017 and said that it was leaving the interest rates unchanged at -0.5%. Currently, the Riksbank purchases over 35% of the outstanding Swedish government bonds. The central bank will continue purchasing both nominal and index-linked debt securities, which previously stood at 245 billion SEK.

“The Executive Board of the Riksbank has decided to hold the repo rate at 0.50 percent, and there is still a greater probability that the rate will be cut than that it will be raised in the near-term,” the statement said.

The policy changes by the central bank was widely expected as it faces a difficult time balancing the economy from overheating while targeting the 2% inflation rate. Sweden’s housing prices and economic growth has been in a steady uptrend, fuelled by low borrowing costs, while the increase in inflation has been moderate in comparison. As of the latest reading, Sweden’s inflation rate was seen at 1.4%, well off the 2% target rate. Housing prices have doubled over the past 10 years.

In its monetary policy statement, Riksbank said “increasingly strong economic activity creates the conditions for inflation to continue rising. But there are risks that can jeopardize the upturn in inflation.” The central bank said that it would continue to monitor the policies from the European Central Bank signaling that any further easing from the ECB could potentially see the Riksbank follow through. A weaker Euro against the Swedish Krona would make imports into Sweden cheaper weighing further on inflation, a key metric that the central bank is determined to push higher.

The central bank also signaled higher probability for a rate cut than a rate hike in the near-term noting that it does not expect the borrowing costs to rise until early 2018.

Due to the widely expected move, the markets were initially muted as economists forecasted an increase in bond purchases alongside steady interest rates. The SEK strengthened against the euro, as EURSEK fell 1% on the day.

EURSEK: Euro falls on Riksbank policy announcement
EURSEK: Euro falls on Riksbank policy announcement

Experts believe Riksbank will hike rates by the end of 2017

Experts have however argued that the pace of the rate hikes will be faster than expected as communicated by the central bank. In the near term, however, experts believe that the Riksbank is likely to stand pat on policy, on both interest rates and bond purchases.

We do not expect that more stimuli will be provided from here,” said Andreas Wallstrom at Nordea pointing to the fact that strong Swedish economy and the limited effectiveness of further rate cuts or QE extensions as the main reasons why policy will most likely be left unchanged in the New Year.

SEB Bank analysts said that they expect a 25 basis point hike bringing interest rates to -0.25% by the end of 2017. “We think the Riksbank’s outlook for growth and unemployment is too cautious, next year in particular,” analysts at SEB bank said. Similar views were also expressed Capital Economics. Stephen Brown said “We think that the Riksbank is underestimating how quickly price pressures will build in the coming year. So despite the bank anticipating another rate cut and not foreseeing a rise until 2018, we think that a rate rise will come before 2018.”

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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