Riksbank holds fire, but more QE, possibly covered, anticipated

Sweden’s Riksbank kept the repo rate unchanged at minus 0.35% yesterday (Thursday), although market participants still expect the central bank to engage in further monetary policy measures over the coming months.

Market participants had largely been expecting the repo rate to remain unchanged, according to various surveys, although a substantial minority of around one-third had expected a cut of 10bp or more.

The krona strengthened on the back of the Riksbank’s announcement, although Valentin Marinov, head of G10 FX strategy at Crédit Agricole CIB, said that the currency could remain vulnerable after that relief rally.

“The statement does not read hawkish at all and the Riksbank highlights that rates could be cut and QE expanded again,” he said.

The central bank said it will continue with its purchases of government bonds until the end of the year, in line plans announced in July, and that the repo rate is expected to be minus 0.35% for about one year, while the repo rate path reflects the possibility of lowering the repo rate further.

It went on to say that it is maintaining “a high level of preparedness to rapidly make monetary policy even more expansionary … if this becomes necessary”, citing further rate cuts and an expansion of government bond purchases.

“The Riksbank is also prepared to intervene on the foreign exchange market if the upturn in inflation should be threatened as the result, for instance, of a very problematic development in the markets,” it added. “The purchase of other types of securities and the launch of a programme for lending to companies via the banks may also come into question.”

In an SEB survey of market participants ahead of the Riksbank’s announcements 70% of respondents indicated that they expect one or more of a variety of monetary policy measures – such as additional asset purchases, currency intervention or a rate cut – in the next six months. Almost 20% predicted covered bond purchases.

However, a covered bond analyst said that he would be surprised if the Swedish central bank followed the European Central Bank’s example of a covered bond purchase programme given house price and mortgage market developments in Sweden.

“A covered bond purchase programme would seem absurd to me,” he said, “but I continue to learn every day.”