Swedish Central Bank Plans Aid to Economy Against Virus

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Exactly a week after the Federal Reserve delivered a half-point emergency interest-rate cut, Sweden’s Riksbank is making clear it sees little sense in copying such policy steps to fight the fallout of the coronavirus.

The Riksbank, which revealed on Monday that one of its own board members had caught the virus, does “not see a lower policy rate as the most important measure at present,” Governor Stefan Ingves said in a statement on Tuesday.

Instead, the bank’s “assessment right now is that maintaining the supply of liquidity is the most important thing,” he said. “This could be more generous terms for loans to banks and/or direct purchases of securities.” Ingves also said the bank will make sure its balance sheet isn’t reduced in the coming year.

The Riksbank’s apparent determination not to cut rates follows signs that last week’s emergency stimulus from the Fed did little to stem the spread of panic across markets. Ingves, who spoke to Swedish lawmakers on Tuesday, said “there is no organized cooperation” among central banks “at present.”

Read More: Riksbank May Still Cut Rates on Inflation, Danske Bank Says

The world’s oldest central bank ended half a decade of negative interest rates in December, despite a slowdown in the Swedish economy. Back then, Ingves said zero was a better vantage point from which to steer monetary policy.

But Swedish inflation has since moved further away from the Riksbank’s 2% target and the spread of the coronavirus now threatens to damage the nation’s trade-reliant economy. The government has already warned that the fallout of the virus will wipe 0.3 percentage points off GDP growth.

Johanna Jeansson of Bloomberg Economics said there’s little question the Riksbank will soon unveil more measures.

“It’s become clear the Riksbank will be forced to help stem the economic fallout from the coronavirus,” she said. “We expect the bank to use its balance sheet to counter financial stress and uncertainty through targeted loans or expanded bond purchases already this spring. While we don’t expect a rate cut, there is still a risk that the Riksbank will be forced to go negative again if the core inflation outlook worsens.”

The Riksbank’s announcement came amid reports that the Swedish government was also planning to unveil additional spending. The krona initially strengthened as much as 0.8% against the euro, before trading little changed.

Lina Fransson, an economist at SEB, said there remains a risk that Sweden may need to cut its main rate.

“In our view the markets should price some probability for this scenario,” Fransson said in a note to clients. But Ingves’s comments on Tuesday imply “that it will require significantly weaker growth and threats of deflation for a rate cut,” she said.

--With assistance from Alastair Reed.

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

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net

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