Riksbank Rejects Calls for QE After Resorting to Zero Rate

By Johan Carlstrom

Photographer: Simon Dawson/Bloomberg

Stefan Ingves, governor of Sweden's central bank, has been reluctant to lower rates out... Read More

Sweden’s central bank rejected calls for unconventional policy measures after venturing into uncharted territory and cutting its main interest rate to zero.
“We think that will be enough,” Governor Stefan Ingves said today at a press conference in Stockholm. “But if the world turns out completely differently, then we have the tool box to do other things.”
The world’s oldest central bank has come under attack from former board members, politicians and economists for being too quick to raise rates as the financial crisis eased in 2010, and then for waiting too long to fight the deflation that ensued. The missteps may
hold lessons for policy makers elsewhere as the Federal Reserve times its exit from monetary stimulus and the European Central Bank fights disinflation.
Nobel Laureate Paul Krugman has said Sweden’s failure to prevent deflation was an example of “sadomonetarism” that risked lurching the Nordic country into a Japan-like syndrome.
Consumer prices in Sweden have dropped in seven of the past nine months and inflation has stayed below the Riksbank’s 2 percent target for almost three years.
As well as delivering a bigger-than-estimated cut -- economists surveyed by Bloomberg had foreseen a reduction to 0.1 percent -- the Riksbank delayed tightening plans to mid-2016 from its previous guidance of end-2015. The bank said it won’t raise rates until “inflation clearly picks up.”

Krona’s Plunge

Today’s cut from 0.25 percent was the Riksbank’s third phase of easing in less than a year. The krona lost 1.3 percent against the euro and traded at 9.3826 as of 1:27 p.m. local time. The move was the day’s biggest decline among the world’s major currencies tracked by Bloomberg.
“This was more or less as aggressive as they could be,” said Knut Hallberg, an analyst at Swedbank AB. “More surprises on the downside will have to happen both in terms of growth and inflation for there to be any talk of further measures, so it’s not our main scenario that more will be needed.”
The Riksbank now predicts inflation will remain below its 2 percent target until July 2016. It lowered its estimate for growth next year to 2.7 percent from 3 percent and raised its forecast for 2016 to 3.3 percent from 3.1 percent.
Analysts immediately questioned whether today’s rate cut will be enough.

‘Attack Plan’

“They should have presented a clear plan of attack,” said Roger Josefsson, chief economist at Danske Bank A/S in Stockholm. “This is what we might do and, for example, say, which measures would be first in line. Not just push back the repo rate path. Is it QE, is it a currency floor?”
Ingves, who’s also chairman of the Basel Committee on Banking Supervision, has been reluctant to lower rates out of fear of stoking a build-up in consumer debt.
Now, Ingves is shaping Swedish policy to reflect moves elsewhere and bringing rates in line with those at the European Central Bank, whose benchmark is 0.05 percent, and the U.S. Federal Reserve, which has held its key rate close to zero since 2008. The ECB and Fed have also expanded their balance sheets through asset purchases to further stimulate growth.
Lars E. O. Svensson, who left the Riksbank in protest last year after failing to win support for deeper cuts, said last week the bank may also need to resort to unconventional measures such as asset purchases and possibly even a currency floor.

High Unemployment

Traders’ two-year inflation expectations were for 1.6 percent last month, while a survey from the National Institute for Economic Research showed consumers’ one-year inflation view sank to zero last month.
A coalition led by the Social Democrats last month ousted the government after accusing it of not doing enough to reduce Scandinavia’s highest unemployment. It has discussed forcing the Riksbank to include a jobs target amid criticism the bank has focused too much on Swedes’ record-high debt burdens.
Swedish property prices have almost tripled since 1995, while consumer debt has nearly doubled to about 175 percent of disposable incomes. In a bid to avoid regulation, the Swedish Bankers’ Association recently proposed forcing homeowners to amortize all new mortgages worth more than 50 percent of their properties.
Swedish household borrowing growth accelerated at a faster-than-expected 5.7 percent last month, up from 5.1 percent at the beginning of this year, according to Statistics Sweden.
The bank said today that it’s now “even more urgent” to manage risks from high household indebtedness.