Sweden Deepens Negative Interest Rates to Curb Gains in Krona

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Riksbank Raises Main Rate to 2% as Price Pressure Gains
The headquarters of the Swedish Central Bank, right, sit in Stockholm, Sweden. Photographer: Casper Hedberg/Bloomberg

Sweden’s central bank lowered its main interest rate deeper into negative levels and expanded its bond purchases to the end of the year as the turmoil in Greece raises the specter of further krona gains.

The repo rate was cut to minus 0.35 percent from minus 0.25 percent, the Stockholm-based bank said in a statement. A reduction was predicted by 4 of 18 analysts in a Bloomberg survey, with the remainder forecasting no change. The bank expanded its bond purchasing program by 45 billion kronor ($5.3 billion) to the end of year, adding to the 80 billion kronor to 90 billion kronor already announced.

“Inflation is rising and economic activity in Sweden is continuing to strengthen,” the bank said. “But uncertainty abroad has increased and it is difficult to assess the consequences of the situation in Greece. Since the repo-rate decision in April, the krona has also become stronger than the Riksbank had forecast and the development of the exchange rate remains a risk to the upturn in inflation.”

Swedish policy makers have unleashed unprecedented measures this year to jolt the largest Nordic economy out of disinflation. They were forced to respond after record stimulus by the European Central Bank threatened to drive up the value of the krona and further hamper their fight to bring back price growth, which has been near zero since the end of 2012.

The krona slumped as much as 1.1 percent, and was down 0.7 percent to 9.3329 per euro as of 10:23 a.m. in Stockholm.

Intervention Ready

The bank said it has “a high level of preparedness” to add stimulus and reiterated it can “intervene on the foreign exchange market if the upturn in inflation is threatened as the result of, for instance, a very problematic development in the markets.”

“The purchase of other types of securities and the launch of a company lending program via the banks may also come into question,” the Riksbank said.

Most analysts had expected no change after an unexpected pick-up in inflation in May provided some relief to policy makers. A survey in June also showed five-year inflation expectations -- a key gauge for the bank -- rose for the first time in four years.

The Riksbank said it expects its repo rate to remain unchanged over the next year, while signaling it may slide to below minus 0.41 percent by the end of the year.

“They showed they are serious,” said Knut Hallberg, an analyst at Swedbank AB. “It’s surprising, but you can follow their reasoning. The new purchases of government bonds are also impressive. At the end of the day it will drain liquidity from that market and push rates down.”

“As of now, we have status quo,” he said. “From this point, things must gradually worsen for another cut to come.”

The bank kept its repo rate unchanged in April after two cuts earlier in the year. Policy makers then added 40 billion kronor to 50 billion kronor to its bond buying from an initial 40 billion kronor announced since February.

The moves earlier this year had limited success in keeping the krona from strengthening against the euro, as the ECB’s own bond purchases and the turmoil in Greece weigh on the common currency. Before today, the krona was up more than 2 percent against the euro this year.

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