ECB Undermines Riksbank's Clout as All Measures End in Limbo

  • Riksbank to increase quantitative easing program by SEK45 bln
  • Bank calls inflation revival fitful, global outlook uncertain

Sweden’s Riksbank dodged a bullet as the European Central Bank decided to refrain from adding even more stimulus -- for now.

Swedish central bank Governor Stefan Ingves said on Thursday he took “proactive” approach in delivering a little more stimulus as the bank signaled it stands ready to do more to keep the krona in check. His approach paid off as the ECB President Mario Draghi just hours later decided to hold off on digging even deeper into his toolbox and said his policies are working.

What the Riksbank does next “depends to a large extent on the ECB,” said Knut Hallberg, an analyst at Swedbank. “If they breathe a word of being prepared to do more, then the pressure on the Riksbank will rise again.”

Sweden’s central bank said earlier on Thursday it will buy more bonds to drive down longer yields as policy makers try to fight currency gains that threaten to undermine their efforts to rekindle inflation. The krona is the strongest performer, besides the yen, of the 10 currencies tracked in Bloomberg Correlation Weighted Indexes over the past year.

The bank kept its benchmark repo rate at minus 0.5 percent, as expected by all 20 economists surveyed by Bloomberg. It will add 45 billion kronor ($5.6 billion) to its quantitative easing program, including 15 billion kronor in inflation linked bonds, to be purchased during the second half of the year.

“With continued expansionary monetary policy abroad, there is a risk that the krona will appreciate earlier and faster than in the forecast,” the Riksbank said.

The krona initially traded as much as 0.8 percent higher against the euro, but gains were pared after the ECB’s rate meeting.

“Our policies work, they are effective -- just give them time,” ECB president Draghi told reporters in Frankfurt after policy makers kept rates unchanged at record lows and maintained asset purchases at 80 billion euros ($90 billion) a month. “If there were also structural reforms, the effect of these policies would be quicker.”

Andreas Wallstroem, an economist at Nordea Bank AB, said his “main scenario is that we will see no additional easing measures from the Riksbank in this cycle.” Nordea forecasts the first rate increase will come in the second quarter of next year. “However, as we don’t see that inflation will rise to the 2 percent target within the forecast horizon, further easing measures cannot be ruled out.”

“The pressure could mount already this afternoon should the krona strengthen on the back of the ECB decision,” he said. The Frankfurt-based bank is due to publish its rate decision later today, with economists surveyed by Bloomberg predicting no change.

“Although inflation is rising, the upturn is fitful,” the Riksbank said. “At the same time, there is still uncertainty over global developments and monetary policy abroad is very expansionary.”

The extra purchases will add to an existing 200 billion-krona QE program targeting about one-third of Sweden’s nominal government bonds by the end of June. Riksbank Governor Stefan Ingves has resorted to unprecedented stimulus as the bank has failed to reach its 2 percent inflation target for about half a decade. But policy makers are torn over how best to deploy their toolbox as the property market overheats.

The bank has sought to extend its macro-prudential powers despite opposition from both the financial regulator and the debt office. In a recent study of Sweden’s monetary policy co-authored by former Bank of England Governor Mervyn King, greater coordination between monetary and regulatory policy is suggested as a way to tackle Sweden’s financial market challenges.

What’s more, Sweden is enjoying an economic boom with growth rates in excess of 4 percent. A number of analysts have questioned what impact more easing will have on an economy steaming ahead at such a pace.

The Riksbank is “caught between a domestic economy that is booming while uncertainty in the rest of the world and the financial markets will continue to exert pressure on the Swedish krona and inflation,” said Joergen Kennemar, an economist at Swedbank. “In particular, the more expansive stance of the ECB, but also the Fed, could force the Riksbank to reverse its course of a scale-back monetary policy. Thus, if the ECB and the Fed prevail, the pressure will again arise late this year or early next year.”

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