Riksbank maintains policy rate at -0.5 pct, extends QE program

The Swedish central bank, Riksbank, kept its policy rate on hold at -0.5 percent today during its meeting. However, the central bank extended its QE program by SEK 15 billion in nominal government bonds and by equally much in index-linked bonds in the first half of 2017.

The repo rate path was kept unchanged and therefore still has a short-term easing bias.  Meanwhile, the governing board was divided in its decision on extending the QE program with governor Flodén, Skinglsey and Ohlsson making reservations.

Furthermore, the Riksbank would be reinvesting maturities and coupon payments on the government bond next year to a value of about SEK 30 billion. There would be a huge maturity in August, but reinvestments would start at the beginning of next year and are planned to continue throughout 2017.

The central bank made no major revisions to the macro economic outlook. The inflation forecast remained the same. It expects CPIF-inflation to average 1.6 percent next year and 1.8 percent in 2018. Meanwhile, it projects core inflation to be at 1.3 percent next year and 2 percent in 2018.

Inflation continues to be a challenge for the central bank and it is unlikely to reach the target rate by the end of 2018. Moreover, the trade-weighted SEK is likely to be a bit weaker compared to the October forecast. The SEK is already trading at a stronger rate than the Riksbank forecast for first quarter 2017.

“Despite this we do not expect that more stimuli will be provided from here. Neither rate cuts, nor further expansion of QE programme are in the pipeline”, stated Nordea Bank.

The robust economy and the restricted effectiveness of the tool box are significant reasons for this. However, given the current SEK forecast, there is a clear risk that the central bank would be challenged again in 2017. There is a possibility that the Riksbank would lower interest rate rather than hike in 2017, added Nordea Bank.