Riksbank: Rate cut may yet come, but not needed now

Stockholm

SWEDEN'S central bank said it may yet need to cut interest rates below zero as policy makers agree that the crisis triggered by Covid-19 calls for extraordinary support measures.

For now, the bank left its main rate at zero, as expected by most economists. "However, this does not rule out the possibility of the interest rate being cut at a later date if this is deemed an effective measure to stimulate demand and support the development of inflation in the recovery phase," it said on Tuesday.

The krona gained about 0.5 per cent against the euro after the Riksbank's statement. Three of the 22 economists surveyed by Bloomberg had predicted a cut, while others had expected an expanded quantitative easing programme. The bank said it will "continue purchases of government and mortgage bonds up to the end of September 2020".

"Although future economic developments are extremely uncertain, everything nevertheless indicates that monetary policy stimulus will be needed in the form of low interest rates and a large amount of liquidity for the foreseeable future. The combination of measures deemed appropriate is constantly evaluated and will be adjusted to economic developments," the Riksbank said.

Governor Stefan Ingves has repeatedly downplayed the need to return to negative rates after bringing five years of the policy to an end in December. Instead, the world's oldest central bank has dramatically expanded an existing bond-purchase programme and created cheap bank loans to prevent a credit crunch.

The Riksbank's reluctance to follow the deep rate cuts delivered by its peers has fed into a global debate on the best policy response to the current crisis.

Robert Bergqvist, chief economist at SEB AB, said Tuesday's statement confirms that the Riksbank "dislikes" negative rates. Nordea's head of macro research, Mikael Sarwe, called the bank's comments "hawkish". The Riksbank also provided less clear forward guidance than it has in the past, as Covid-19 adds several layers of uncertainty to forecasts.

Sweden already stands out for its overall approach to Covid-19, which has been more relaxed than in other countries. Though its death rate is now higher than elsewhere in Scandinavia, it's well below levels in the UK and Italy, both in absolute and relative terms. What's more, Sweden's decision to avoid a total lockdown may shield its economy from the devastating fallout others now face, according to HSBC.

On Tuesday, the Riksbank said it expects the economy to contract 6.9 per cent this year. But GDP could shrink as much as 9.7 per cent in a worst-case scenario, it said.

"The central bank's own forecast for rates, the rate path, signalled they would remain unchanged until February 2021," said Johanna Jeansson of Bloomberg Economics. "A prolonged downturn may still force the central bank to revert to negative rates in our view." BLOOMBERG