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Swedish Riksbank’s Zero-Rate Policy Faces a Credibility ‘Battle’

Niclas Rolander and Rafaela Lindeberg
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Swedish Riksbank’s Zero-Rate Policy Faces a Credibility ‘Battle’

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The Riksbank’s determination to consign negative interest rates to history encountered its first test on Wednesday after board members united behind the policy but admitted that inflation will be lower than previously expected.

Given the outlook for consumer prices, the central bank may be facing “an uphill battle” on the “communication/credibility” front in the coming months, said Robert Bergqvist, a former Riksbank economist who now heads the macro research department at SEB, one of Sweden’s biggest banks.

The Riksbank, which ended half a decade of subzero policy in December, kept its benchmark at 0% on Wednesday, as expected, and continued to predict that rates will remain on hold in the coming years. The bank said the broad economic outlook was largely unchanged since December, but acknowledged that “falling energy prices are expected to dampen inflation this year.”

Bloomberg Economics’ Johanna Jeansson said, “The Riksbank is taking a bet that this year’s slowdown will be temporary. It remains to be seen how patient they can be as lower energy prices look set to push inflation significantly lower in 2020.”

The krona gained about 0.2% against the euro, bringing the exchange rate to its strongest in roughly a month, with no one on the Riksbank’s six-member board disagreeing with the decision to stick with a zero rate.

Sweden caught the central banking community’s attention last year when it made clear it no longer wanted negative rates. Inflation wasn’t quite at the Riksbank’s 2% target and growth was slowing, but the bank was keen to return to a more normal monetary policy environment.

Central bank watchers are now looking for signs that the Riksbank’s rate experiment is on the right track. There’s a lot at stake for Sweden, which has had to make embarrassing U-turns in the past. Most notably, it was forced into a sudden reversal in 2011 after a cycle of hikes at the height of Europe’s debt crisis proved a painful mistake.

“Policy makers appear happy to stay in wait-and-see mode for the time being, but we suspect that they will have to loosen policy before long,” David Oxley, senior Europe economist at Capital Economics, said in a note to clients.

What Bloomberg’s Economists Say

“The Riksbank kept interest rates on hold today, brushing aside downside risks to inflation from slower global growth as well as a slump in domestic energy prices. While the inflation outlook for 2020 is weak, we expect the central bank to keep rates at zero for at least the remainder of this year.”

-Johanna Jeansson. See her SWEDEN REACT and SWEDEN INSIGHT

The decision to lower the inflation outlook followed a decline in energy prices, which may give the Riksbank some leeway to stick to its guns, according to some economists. The forecast for slower price growth “has no impact on the rate path,” because it stems from a “supply shock from energy,” said Stefan Mellin, a senior analyst at Danske Bank in Stockholm.

Since the Riksbank’s December rate increase, there hasn’t been enough economic data to get a clear sense of where things are headed. Inflation ended the year slightly closer to the bank’s 2% target, but some economists expect price growth to slow to less than half that in the period ahead.

Much of the risk now relates to global trade. First it was the Trump White House’s clash with China, now the coronavirus looks set to play a growing role in hampering global commerce. For a trade-reliant nation like Sweden, that’s bad news.

Governor Stefan Ingves has argued that a zero rate provides a better “vantage point” from which to conduct policy. But he and other Riksbank board members have also suggested it may be necessary to resort to negative rates again.

Speaking at a press conference in Stockholm after the rate decision, Ingves signaled that the bank views the development in energy prices as a temporary shift caused by a bout of mild weather. And it’s “very difficult to adjust monetary policy to weather forecasts,” he said. Longer term, the Riksbank expects gauges of underlying inflation to “remain pretty stable,” he said.

Here’s What Riksbank Said About QE -

“The Executive Board will determine in good time whether it is appropriate to continue purchasing government bonds after December 2020 and communicate this plan. In the long term, the holdings are expected to be smaller than they are today. The Riksbank will adapt the details regarding the purchases of government bonds in view of how the economy develops.”

The bank’s stance on quantitative easing has some economists raising questions. “The Riksbank should really start considering how they shall relate to their inflated balance sheet over a longer term,” said Mattias Sundling, chief equity strategist Danske. “The rates market is functioning poorly and it would be interesting to hear what their view on what the long term equilibrium is. All they are saying is that QE will be chugging on as previously said.”

(Adds Bloomberg Economist comment)

--With assistance from Zoe Schneeweiss.

To contact the reporters on this story: Niclas Rolander in Stockholm at;Rafaela Lindeberg in Stockholm at

To contact the editor responsible for this story: Tasneem Hanfi Brögger at

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