Although Riksbank extended its asset purchases by SEK 40-50 billion recently, Morgan Stanley says there is room to further extend the QE program to as much as SEK 170 billion in order to technically offset the purchases by the ECB in the euro area.
Marcus Gedai of Morgan Stanley in his April 29, 2015 research report titled: “Riksbank Policy Decision, April 2015” points out that with an extremely accommodative monetary policy in Sweden, financial stability risks would increase further.
Riksbank’s less aggressive stance
The Morgan Stanley analyst notes while unveiling its policy decision in April 2015, the Riksbank refrained from cutting rates further, but extended its asset purchases by SEK 40-50 billion, while lowering the repo path significantly. The latest action from Riksbank has put total purchases at SEK 80-90 billion, or some 8 to 9% of the nominal market.
As outlined by ValueWalk, Sweden’s central bank the Riksbank unexpectedly trimmed its main interest rate from minus 0.1% to minus 0.25% last March. The central bank cut its interest rates and expanded its government-bond purchase plan outside of its schedule for policy decisions.
Gedai says the new repo rate is expected to remain at -25bp until the second half of 2015 and is anticipated to rise only slightly thereafter. Moreover, the world’s oldest central bank is showing a 50/50 chance for another 10bp cut by the end of the year. He anticipates the repo rate to be very low -0.75% even in 2018, indicating that monetary policy in Sweden is going to stay highly accommodative for a very long time. The analyst draws attention to the central bank’s statement that it would stand ready to act if necessary, even between ordinary monetary policy meetings.
Gedai points out that FX intervention by Riksbank was earlier considered as an option of last resort. However, recently the bank indicated that it is ready to intervene in the currency market if the upturn in inflation is threatened by “very troublesome market developments”. Hence, the analyst notes chances for intervention seem to have increased significantly following the latest statement from the central bank.
Further easing likely from Riksbank
The Morgan Stanley analyst differs significantly from the central bank’s inflation projections. The Riksbank anticipates CPI inflation rising to 2.0% in January 2016 and above target for most of next year, hitting 2.7% in 2017. However, Gedai anticipates inflation not hitting the target until 2017.
He argues the central bank’s target is extremely optimistic and one shouldn’t be surprised by downward revisions to the Riksbank’s outlook going forward.
Considering the downside risks and optimistic inflation outlook, he also predicts further easing in the coming months. Moreover, with stronger growth in the next few quarters and further EUR weakness leading to a sudden SEK appreciation, downside risks to the central bank’s inflation outlook could be exacerbated.
Gedai points out that besides the downside surprise in inflation, if there are any signs of significant SEK appreciation, we could see another 10bp cut and further asset purchases of up to SEK 80 billion as well as direct FX interventions.
He concludes that with such an extremely accommodative monetary policy, financial stability risks are likely to increase further. However, the Riksbank has stressed that these risks must be managed by the government and other authorities by initiating suitable measures including targeting household indebtedness.