Swedish Central Bank Reveals Grim View of Latest Covid Trend

(Bloomberg) -- The Riksbank governor, Stefan Ingves, fears the economic outlook is deteriorating amid signs the coronavirus pandemic is tightening its grip across Europe, and ensnaring Sweden again too.

“If you look at our forecasts, it will take a few years before GDP is back” at pre-crisis levels, Ingves said in an interview in Stockholm. “And those forecasts were done before the rather bleak situation that we are seeing in Europe today, so there’s reason to believe that the risks at the moment are skewed more to the downside.”

Sweden has stood out for its hands-off strategy in tackling the Covid crisis. The country suffered a higher death rate than many other places in Europe, but had seemed a likely candidate for herd immunity. What’s more, its decision to avoid a lockdown appeared to shield the Swedish economy. However, recent figures show it hasn’t escaped the second wave of infections engulfing the rest of the region.

The Riksbank’s latest economic forecasts for Sweden, published on Sept. 22, point to a 3.6% GDP drop this year, less than half the contraction predicted for the euro zone by the European Central Bank. The Riksbank kept its main interest rate at zero last month, and Ingves wants to rely more on asset purchases than rate cuts to support the economy.

“Buying 45% of the outstanding stock of government bonds hasn’t been a problem,” the governor said, adding that the Riksbank “can buy a lot more” covered bonds, “and the same thing goes for municipal bonds.”

Asked about the Riksbank’s decision to include corporate bonds in its purchases, Ingves said the size of the program means “there’s a lot of room left.”

The corporate-bond program, launched this year after Sweden’s credit market temporarily froze, has drawn criticism from institutional investors who say the intervention is untimely and bad for pricing. Ingves has argued that the bank needs to expand its toolbox so that it’s prepared to act in case there’s another bout of market turmoil.

But monetary policy shouldn’t be the only support mechanism, according to the governor.

“We expect expansionary fiscal policy this year and next, which is reasonable given the circumstances,” he said. “Fiscal policy can assist with general demand, and the higher the demand is, the more likely it is that inflation will also rise. But the aim of fiscal policy is not to bring up inflation. That is our job.”

What Bloomberg’s Economists Say...

“Our high-frequency, activity tracker through Oct. 20 shows Swedish activity has slowed compared with other advanced economies in the past few weeks” -Johanna Jeansson. Read her SWEDEN INSIGHT

Despite years of historically low interest rates, the Riksbank has failed to restore price growth to its 2% target. The inflation rate followed by the Riksbank was just 0.3% in September. Last week, Danske Bank’s chief economist said the central bank appears to have run out of options to revive inflation.

“We have to live with the fact that it will take a couple of years before the inflation rate approaches 2% again,” Ingves said.

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