Photographer: Casper Hedberg/Bloomberg

Birthplace of Negative Rates Nears End of the Road for Stimulus

  • 3 of 6 board members entered reservation against Riksbank QE
  • Swedish central bank now seen done with adding more stimulus

The region that gave birth to negative interest rates is signaling that monetary policy has reached the end of the line.

The Swedish central bank on Wednesday extended its quantitative easing program into next year, while keeping its benchmark rate at a record low of minus 0.5 percent. But it wasn’t a gimme. Governor Stefan Ingves had to use his tie-breaking vote push through the expanded asset purchases, quelling a revolt on the six-member board.

“What stands out is that there wasn’t unity on the board around the QE program,” Robert Bergqvist, chief economist at SEB, said by phone. “The big picture is that the unconventional monetary policy in Sweden is going in for a landing now, and this is also in line with what other central banks have done.”

After more than two years ago unleashing an all-out effort to avoid deflation from taking hold, policy makers in Stockholm are coming to the same realization as their colleagues at the world’s largest central banks. The Bank of Japan has switched focus from printing money, while the European Central Bank has signaled it’s nearing the end to bond purchases. In the U.S., the Federal Reserve is now preparing for faster tightening after almost a decade of near zero rates.

By adding stimulus at a reduced pace, Swedish policy makers are seeking to keep up with the ECB’s asset purchase program in a bid to hold the krona down to avoid inflation from backtracking. But the extension was met with deepening opposition within the bank, with two of its six members calling for an abrupt halt, while another only wanted to buy half the amount.

The bank will buy an additional 15 billion kronor each in both nominal and inflation-linked government bonds, tapering from a total of 45 billion kronor in the six months through the end of this year. All but one of the analysts surveyed by Bloomberg anticipated the move.

The bank’s historic policies are increasingly being questioned by economists and even other authorities, who argue they are making Sweden poorer by punishing the krona and risking financial stability amid soaring consumer debt and housing prices.

“Increasingly strong economic activity creates the conditions for inflation to continue rising,” the Stockholm-based Riksbank said in a statement. “But there are risks that can jeopardize the upturn in inflation. Monetary policy therefore needs to remain very expansionary.”

Sweden’s economy is growing at a healthy pace, unemployment is falling, while house prices and household debt continue to set all-time highs. But inflation is still below the 2 percent target, clocking in at 1.4 percent in November. The trade-weighted krona has weakened about 16 percent since early 2013.

Sweden’s debt office has expressed concern about worsening liquidity in the government bond market as a result of the Riksbank’s action. With ultra-low borrowing costs driving debt burdens and creating a regulatory headache, the financial watchdog this week said the central bank should consider giving itself more time to reach its inflation target.

Riksbank Governor Stefan Ingves cautioned against assuming that the bank is done with adding more stimulus, reiterating that it can still lower rates further as well as buy more bonds if inflation turns out much lower than expected.

“I wouldn’t take anything for granted when it comes to what to do and not to do,” Ingves said in an interview after the press conference. “At the end of the day you have to do whatever it takes to get inflation to 2 percent.”

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