Sweden’s Riksbank ‘in panic mode’
The surprise introduction of a negative -10bps repo rate and commitment to SEK10bn in quantitative easing-led purchases of Swedish government bonds indicates that the country’s central bank “obviously signals to the markets that it is in panic mode,” according to the reaction of Nordea Markets analysts.
“It is very hard to understand why they should be in panic mode given strong economic growth, employment surging and house prices rising 15%. But the days are over when monetary policy in Sweden made any sort of economic sense. So crazy can always get crazier…”
Analysts at Handelsbanken added their view on the surprise.
“All in all, this was much more action than expected. The consensus forecast was for a no-change rate decision (also our forecast). The asset purchases came as a surprise as well. Deputy Governor Marin Flodén entered a reservation against the decision to buy government bonds now. Otherwise, the Riksbank board was unanimous.”
Sweden’s currency has taken a sharp hit from the announcement.
“The Riksbank’s impact on the SEK has been huge so far, and this will “mechanically” create inflation as imported goods become more expensive. Thus break-even inflation should widen even though index-linked bonds were not included in QE program,” Nordea said.
However, there may be further surprises ahead, warned Handelsbanken: “The risk is high that the Riksbank will need to return with an additional rate cut down to -0.25% in April and also increase the QE program to maybe 20 bn SEK including purchases out to 10 year bonds. Currently, the market is pricing a 4 bps rate cut in April and a repo rate at -17 bps at year-end.”