Sweden’s central bank Riksbank unexpectedly cut its main interest rate from minus 0.1% to minus 0.25% on Wednesday and will buy government bonds for SEK 30 billion to try and boost inflation.
The repurchase rate had stood at minus 0.1% since February.
Riksbank trims repo rate
Riksbank trimmed interest rates and expanded its government-bond purchase plan outside of its schedule for policy decisions. On Wednesday, the central bank took further steps to combat low consumer price growth, after the economy eased out of deflationary mode in February for the first time in seven months.
In an effort to revive their economies and prevent significant currency appreciation, central banks from the euro area to Denmark are easing monetary policy, adopting measures that include buying public debt and imposing negative interest rates.
The Stockholm-based bank said in a statement Wednesday that Sweden’s benchmark repo rate was lowered to minus 0.25% from minus 0.1%.
Relating to the latest announcement, Sweden’s krona weakened the most in 16 months against the euro. The krona weakened 1.5% to 9.3450 per euro at 2:20 p.m. London time, and headed toward the steepest decline on a closing basis since November 2013. The Swedish currency dropped 1.4% to 8.8062 per dollar, and touched 8.8275, the weakest since March 2009.
Negative headline inflation in Sweden for past 2 years
In a statement, Riksbank, the world’s oldest central bank said: “There are signs that inflation has bottomed out and is beginning to rise, but the recent appreciation of the krona risks breaking this trend”. The central bank targets 2% inflation.
Riksbank also announced Wednesday that it will buy nominal government bonds for the sum of SEK 30 billion with maturities of up to 25 years. These purchases, which will begin on 26 March and are expected to be completed at the beginning of May 2015, are an extension of the purchases made in February and March.
Data from Tradeweb reveals two-year Swedish bonds traded at -0.34% versus Tuesday’s close of -0.22%; five-year bonds at -0.006% vs Tuesday’s close of 0.12%, while 10-year bonds traded at a yield of 0.428% vs 0.60%.
A few days back ValueWalk carried an article on the prospect of a U.S. Fed rate hike. We highlighted how Riksbank raised rates in 2010 despite inflation that was below the 2% target. The Swedish rate hike was a reaction to anticipated inflation, which in hindsight, was unlikely to have occurred even with a zero rate policy. The Riksbank had to reverse quickly in 2011 when it re-entered a rate cut cycle. However, the cuts did not come fast enough, and the Swedish economy has suffered deflation over the past two years.
Richard Milne of Financial Times notes Riksbank’s latest cut highlights the pressure being placed on small independent countries’ monetary policies after the start of the European Central Bank’s QE programme. The Riksbank’s move is likely to raise the heat on other central banks in the Nordic region.