Riksbank stays neutral. QE extension unlikely: Meeting Minutes

Nov 14, 9:19 am
Riksbank

Riksbank meeting minutes from October released; Minutes show a cautious stand from the central bank as QE purchases likely to end in December 2017.

Summary:

  • Riksbank releases meeting minutes from the October 26 policy meeting
  • Rate hike expectations still a far way off
  • Riksbank could end QE as the current course of bond purchases expires in December
  • Riksbank does not rule out QE extension at a later stage

The Swedish central bank, the Riksbank released its monetary policy meeting minutes from October. The minutes showed that the central bank expects the soft patch to continue there was an increasing probability that the central bank will not extend its QE when it meets in December.

By the year end, the Riksbank is expected to have purchased nearly SEK290 billion in government bonds which are equivalent to nearly 8% of the nation’s GDP. Although this is small compared to the ECB or the Fed’s purchases, the central bank owns close to 40% of the eligible bonds in Sweden.

Riksbank keeps a steady hand

The Riksbank’s monetary policy meeting was held on the same day when the ECB cut back its QE purchases but extended its stimulus program for another nine-month period, due to end in September 2018.

The Riksbank’s main play was to remain in a wait and hold mode. Expectations for a rate hike from the Riksbank still remain a long way off.

At the October meeting, the Riksbank left the repo rate at -0.50%. There was also no change made to the central bank’s QE program which is expected to end this December. Although inflation showed signs of easing, the central bank expects this to be transitory. But at the same time, extending QE would also be seen as a premature move from the central bank.

QE: To extend or not to extend

However, the central bank offset this hawkish expectation by stating that the option to extend QE remains on the table as it assesses new information. At the October meeting, the Riksbank also said that it postponed the proposed mandate for quick currency market intervention to July 2018. This came as two members of the board expressed their concerns.

The minutes showed that members of the board were divided. Some expressed that the QE bond purchases should continue beyond December. However, broadly the board agreed that it was best to wait until December to assess the economy.

The central bank members also discussed the housing markets. Given the weaker pace of inflation and wage growth, the central bank agreed to remain cautious in the upcoming meetings.

The central bank did not make any major changes to its economic forecasts. With wage growth and inflation remaining modest, the central bank’s decision to keep the options open for further easing was seen to be justified.

The markets are currently expecting to see the first repo rate hike from the Riksbank only in the fourth quarter of next year. Forecasts show that two additional rate hikes could come in following year, bringing the repo rate to around 0.25% in 2019

Looking ahead: Sweden inflation data for October due today

Speaking on inflation, the Swedish central bank said that inflation was rising for the most part this year. However, headline consumer prices were seen being stable 2.1% on an annual basis in September. Inflation remained steady at 2.1% for two consecutive months now.

The inflation data for October will be released today which will make for an important data to focus on ahead of the December monetary policy meeting. Unless data shows a surprising decline in consumer prices, a flat reading is unlikely to prompt the Riksbank to announce its QE extension in December.

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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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