Move aims to re­vive in­fla­tion and keep the krona from ap­pre­ci­at­ing

The Pak Banker - - FRONT PAGE -

Swe­den's cen­tral bank low­ered its key in­ter­est rate even fur­ther below zero and said it's pre­pared to use its full tool­box of mea­sures as it bat­tles to re­vive in­fla­tion and keep the krona from ap­pre­ci­at­ing. The repo rate was re­duced to mi­nus 0.50 per­cent from mi­nus 0.35 per­cent, the Stock­holm-based bank said. A cut was pre­dicted by 10 of the 18 an­a­lysts sur­veyed by Bloomberg, though only three had an­tic­i­pated this mag­ni­tude.

The bank said govern­ment bond pur­chases will con­tinue as planned for the first six months of 2016 and that it "will rein­vest ma­tu­ri­ties and coupons from the govern­ment bond port­fo­lio un­til fur­ther no­tice."

"Un­cer­tainty re­gard­ing global de­vel­op­ments is still high, with low in­fla­tion and sev­eral cen­tral banks pur­su­ing more ex­pan­sion­ary mon­e­tary pol­icy," the Riks­bank said. "Swedish mon­e­tary pol­icy must re­late to this.

Oth­er­wise the krona ex­change rate is at risk of strength­en­ing at a faster rate than in the fore­cast, which would make it harder to push up in­fla­tion and sta­bi­lize it around 2 per­cent."

The krona slumped as much as 1.6 per­cent to 9.61 per euro, the low­est since Au­gust. The yield on Swe­den's two-year note fell four ba­sis points to mi­nus 0.62 per­cent as of 10:52 a.m. in Stock­holm.

Swedish pol­icy mak­ers have un­leashed un­prece­dented stim­u­lus over the past year to save the econ­omy from de­fla­tion and keep the krona from ap­pre­ci­at­ing. They were forced to re­spond as their col­leagues at the far larger Euro­pean Cen­tral Bank are also go­ing all out to re­vive price growth and sus­tain an ex­pan­sion across Europe.

The Riks­bank so far has been able to sta­bi­lize in­fla­tion ex­pec­ta­tions in the years ahead, while cur­rent con­sumer price growth re­mains far below the tar­get. Even though the econ­omy ex­panded an an­nual 3.9 per­cent in the third quar­ter, un­der­ly­ing price gains slowed to 0.9 per­cent in De­cem­ber.

In­fla­tion by that mea­sure has trailed the cen­tral bank's tar­get for five years. Pol­icy mak­ers, led by Gov­er­nor Stefan Ingves, are be­ing crit­i­cized from all sides. First for not do­ing enough and now for en­dan­ger­ing fi­nan­cial sta­bil­ity. Econ­o­mists at some of Swe­den's largest banks ar­gue that global forces out­side the Riks­bank's con­trol make it vir­tu­ally im­pos­si­ble for the cen­tral bank to reach its in­fla­tion tar­get any time soon. Crit­ics, among them for­mer Bank of Eng­land Gov­er­nor Mervyn King, claim that more stim­u­lus merely in­creases the risk that a hous­ing mar­ket bub­ble may burst. "It's a bit provoca­tive that they so clearly con­tin­u­ing this in­fla­tion hunt," said An­dreas Wall­stroem, an econ­o­mist at Nordea Bank. "There are no signs what­so­ever that they are be­com­ing softer in that fight. A ma­jor­ity in the board still have their minds set on con­tin­u­ing."

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