Riksbank Boss Sees Bonds, Not Rates, as Main Crisis Tool

(Bloomberg) -- Riksbank Governor Stefan Ingves all but ruled out resorting to extreme negative interest rates should a major economic downturn hit, pointing instead to asset purchases as a better crisis-fighting tool.

The man running the world’s oldest central bank has overseen an historic shift in policy since December, when he and his board ended half a decade of negative interest rates. Now, the world is keen to learn how the Riksbank will handle the transition, and whether it can really stick to the new regime.

Speaking in an interview with Bloomberg Television’s Guy Johnson on Wednesday, the Riksbank governor said Sweden still has the flexibility to cut rates.

But Ingves also made clear that he wants to avoid extreme negative rates, “because it would be hard to understand how the economy would operate under those circumstances.”

“So going slightly negative is probably perfectly fine, but beyond that, the higher likelihood would be using the balance sheet in some way or other,” Ingves said. The governor said the comments reflected his own personal preference, and not necessarily the view of the entire board.

The Riksbank is in the middle of a bond-repurchase program that’s set to continue until the end of the year. The bank held government bonds with a nominal value of 336 billion kronor ($35 billion) at the end of January, or 45% of the outstanding stock. On Wednesday, the bank said it will “determine in good time whether it is appropriate to continue purchasing government bonds” after December.

The Riksbank kept its benchmark at zero this week, as expected, and repeated a prediction that the key rate will stay put for the coming years. That’s despite a forecast that inflation will be much weaker than previously estimated due to low energy prices.

The bank “has probably never lowered the inflation forecast this much without impacting the policy stance,” Nordea’s chief analyst Torbjorn Isaksson said.

“We’re certainly prepared to see through the low electricity price,” Ingves said. “We have lived with that for many years, and once in a while you have a spike in the electricity price and once in a while, as happened the other day, it turns negative.”

FX Volatility

Ingves signaled he’s also willing to live with a good deal more volatility in the krona, amid signs the exchange rate is having less of an impact on consumer prices than used to be the case.

“Our impression is that in the Swedish economy, the pass-through is lower today than in the 1990s when we left the peg,” he said. “Now the krona can actually fluctuate quite a lot up and down and it doesn’t seem to affect inflation all that much in the short run.”

Some economists raised questions around the Riksbank’s credibility on Wednesday after it conceded inflation would take longer to reach its 2% target, without at the same time altering its rate forecast.

But in the asset management community, the bank’s apparent commitment to zero, rather than negative rates, played well.

Thomas Elofsson, who oversees 29 billion kronor ($3 billion) as head of portfolio management at Stockholm-based Catella, says he likes the Riksbank’s seeming determination to stay away from negative rates.

“The fact that they’re looking through the downward pressure on inflation that results from declining energy prices suggests that they’re extremely reluctant to cut rates,” Elofsson said. “It is good that they’re trying to distance themselves from the earlier undue focus on small deviations from their target measure.”

Ingves said that in the longer term he’s confident that inflation will reach the Riksbank’s target.

“What we expect will happen is that eventually the electricity price effect will peter out,” he said. “That means that a couple of years ahead we see inflation again rising up toward 2%, which is our goal.”

To contact the reporters on this story: Niclas Rolander in Stockholm at nrolander@bloomberg.net;Love Liman in Stockholm at jliman1@bloomberg.net;Rafaela Lindeberg in Stockholm at rlindeberg@bloomberg.net

To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net, Nick Rigillo

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