Swedish Central Bank Proved Prescient in Moving Ahead of ECB

  • Bank announces it's slowing QE in second half of 2016
  • Governor Stefan Ingves says bank is proactive in approach

Swedish central bank Governor Stefan Ingves took a gamble and pulled it off.

The governor on Thursday decided to keep his key rate unchanged and extended a program to buy bonds to the end of the year. Yet the bank also signaled its unprecedented easing campaign may be coming to an end, sending the krona higher.

Just hours later, ECB President Mario Draghi played right into his hands by holding off on digging even deeper into his toolbox, saying his policies are working. The ECB’s failure to add stimulus pared gains in the krona, which is key for the Swedish bank in its battle to spark inflation.

"The Riksbank was absolutely correct,” said Martin Enlund, a currency analyst at Nordea Bank in Stockholm. "Had the Riksbank not been so dovish, it would have given speculators a kind of green light."

Put another way, not taking any action "would have been a potential policy mistake," Enlund said.

Ingves and his board have been in a bit of a pickle. On the one hand they need to drive inflation up towards the bank’s 2 percent target -- something that hasn’t happened for the last five year. On the other, they need to be wary of the risks of a housing bubble amid a strong economic recovery.

Thursday’s measures were primarily designed to counter currency gains that, in the words of the central bank, "could damp growth and inflation in Sweden and affect confidence in the inflation target.”

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

But as Ingves himself pointed out, what really matters is what much more influential jurisdictions are up to. So Ingves had to be proactive while Frankfurt still had its cards close to its chest.

"Had the Riksbank not done anything, we would have ended up with a completely different krona," said Knut Hallberg, an analyst at Swedbank. "Given the world we’re in, I think this is the only possible way forward. To give up now, after two years of fighting, would be devastating and a big policy mistake."

The Riksbank’s latest bond-buying program involves 45 billion kronor ($5.6 billion), including 15 billion kronor in inflation linked bonds, to be purchased during the second half of the year. That’s down from 65 billion kronor in the six months through June.

Ingves also signaled that further monetary stimulus is "less likely" to be needed "in the period ahead," prompting some commentators to speculate that Sweden’s unconventional monetary policy experiment may be coming to an end.

Ingves, however, is not giving up the just yet.

"Technically speaking, it’s fully possible for us" to cut rates below minus 0.5 percent, Ingves told Bloomberg TV. "As far as we can judge there haven’t really been any serious negative consequences in terms of markets functioning, bank profits and things like that. So we certainly can do more if we feel that we have to."

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