Photographer: Casper Hedberg/Bloomberg

Riksbank Increases Bond Purchases as Key Rate Left Unchanged

Sweden’s central bank beefed up its offering of unconventional measures to revive inflation in the biggest Nordic economy, but unexpectedly kept its main interest rate unchanged.

The repo rate was held at minus 0.25 percent after two cuts earlier in the year, the Stockholm-based bank said on Wednesday. Policy makers will instead step up their fight against disinflation by buying another 40 billion kronor ($4.7 billion) to 50 billion kronor in government bonds, adding to the 40 billion kronor in purchases announced since February.

“These measures and the readiness to do more underline that the Riksbank is safeguarding the role of the inflation target as a nominal anchor for price setting and wage formation,” the bank said. The repo rate path has been “lowered significantly” since February, and “slow increases” are “not expected to begin until the second half of 2016,” it said.

Most analysts surveyed by Bloomberg had predicted a rate cut, with a median estimate of minus 0.35 percent. The krona soared as much as 0.9 percent against the euro and traded 0.8 percent higher as of 10:14 a.m. in Stockholm.

“It was a good decision to leave the repo rate unchanged,” said Annika Winsth, chief economist at Nordea Bank AB in Stockholm. “We already have a very expansionary monetary policy, I don’t think we need more.”

Crisis Mode

The bank’s decision to increase its bond purchases still “leaves the door open to doing more if needed,” Winsth said.

Policy makers are in full crisis mode to jolt the economy out of its disinflationary spiral. The Riksbank is not alone. About 30 central banks have eased policy this year to combat the threat of slower price gains, led by the European Central Bank’s embrace of quantitative easing.

The Riksbank will probably need to cut its repo rate again “sooner or later,” according to Knut Hallberg, an analyst at Swedbank AB. In not matching market expectations for a cut on Wednesday, the Riksbank made a “mistake,” he said.

Swedish policy makers are trying to restore faith in their inflation target as unions and employers prepare for talks next year to set wages for large parts of the economy. Inflation hasn’t reached the Riksbank’s 2 percent target since late 2011.

The bank has been accused of putting economic developments at risk and for not doing enough to lower Scandinavia’s highest unemployment rate. As recently as last year, Riksbank Governor Stefan Ingves warned that excessively easy monetary policy risked fanning household debt growth and property prices.

Inflation Outlook

Inflation was an annual 0.2 percent in March, after prices grew 0.1 percent in February and declined from August through January. Adjusted for interest rates, the annual rate held at 0.9 percent, lagging behind the 1.1 percent estimated by analysts.

“Inflation has begun to rise, although from low levels. This is partly due to the weakening of the krona over the last 12 months,” the Riksbank said. The bank said its expanded quantitative easing program, which will run from May through September and target maturities as long as 25 years, will help it reach the inflation target.

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