Sweden's Riksbank unexpectedly expands monetary stimulus and cuts rates
Sweden’s central bank on Wednesday unexpectedly decided to cut the repo rate and expand monetary stimulus measures in a bid to safeguard the country’s economy.
“There are signs that inflation has bottomed out and is beginning to rise, but the recent appreciation of the Krona risks breaking this trend,” said the Riksbank, as it cut the repo rate by 15 basis points to 0.25% and announced it will buy government bonds for SEK30bn.
Ready to do more
The central bank said the measures were aimed at safeguarding the role of inflation target as nominal anchor for price setting and wage formation. Importantly, it said it is ready to do more at short notice if needed, in order to support the upturn in inflation.
The Riksbank further explained that its expansionary monetary policy has had a positive effect on the Swedish economy. “GDP growth is relatively good, the labour market is strengthening gradually and there are signs that inflation has bottomed out, although it is still low,” said the central bank.
However, it warned that large fluctuations on the foreign exchange market due to the European Central Bank injecting stimulus and the Federal Reserve moving toward a rate hike, combined to create risks for inflation.
“It is difficult to assess the continued path for the krona in this environment. 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,” said the Swedish central bank.
As such, the Riksbank believes that further stimulus is needed and said it stands ready to expand policies, even between the ordinary monetary policy meetings. “The repo rate could possibly be cut somewhat further and the Riksbank could buy even more government bonds,” said the central banking, adding that other measures include the “possibility of interventions on the foreign exchange or buying other types of assets.”
"The statement alongside the decision made it pretty clear that the key prompt was the recent strength of the krona, which has risen by 5% against the euro over the last month. The Riksbank expressed concern that further rises could halt or reverse the recent modest rise in inflation," said Jessica Hinds, European economist at Capital Economics.
"Looking ahead, the Riksbank now expects the repo rate to remain at -0.25% at least until the second half of next year. But it has stressed again its preparedness to loosen policy again and further rises in the krona against the euro as the ECB’s QE programme progresses will surely prompt both further rate cuts and bigger asset purchases," added Hinds.
At 1310 GMT, the Swedish Krona shot up 1.6% against the US dollar to change hands at SEK8.8192.