Sweden's Central Bank Is Moving Closer to Ending Bond Purchases
(Bloomberg) -- The Swedish central bank could soon declare victory in its fight to revive inflation.
The Riksbank will on Thursday keep the benchmark interest rate unchanged at minus 0.5 percent, according to all 25 economists surveyed by Bloomberg. The board is also unlikely this week, or later, to expand its two-year program of unprecedented bond purchases beyond a June expiry, analysts at Sweden’s four biggest banks say.
“It’s generally accepted that the economy is crazily strong,” said Torbjorn Isaksson, chief analyst at Nordea Bank AB in Stockholm. “To increase stimulus in that environment would be very extreme.”
The Inflation Target
Although inflation disappointed big-time in March, consumer price growth has steadily picked up over the past couple of years. Adjusted for mortgage costs, inflation in February even hit the bank’s 2 percent target for the first time in more than six years.
At the same time, the massive stimulus and threats of more action have boosted inflation expectations to around target.
The decision comes as policy makers could, as soon as next month, also change the inflation gauge they target, switching to one that excludes mortgage costs. They may also decide to re-introduce a tolerance interval of a percentage point on either side of its 2 percent target.
Both changes could make it easier for the Riksbank, whose founding in 1668 makes it the world’s oldest central bank, to tighten policy sooner.
The economy is surging, with data over the past two months showing falling unemployment, rising consumer spending, booming industrial activity and improving confidence. The government last week announced it was boosting spending this year as deficits turn into surpluses.
The Riksbank’s other main concern over the past couple of years, the krona, is becoming less of a headache. It has slid almost 3 percent since a high in February and is now 1.2 percent weaker than forecast by the bank in the first quarter. That said, the bank will still likely “weigh its words in gold” to prevent the krona from climbing too quickly, analysts at Nordea said in a note.
The Bond Market
Extending quantitative easing is also tricky. The bank is running up against limits on how much of the bond market it can corner. Since it started buying Treasuries two years ago, the Riksbank has soaked up 257 billion kronor ($29 billion) in nominal debt, or almost 40 percent of the total. It also owns 13.5 percent of inflation-linked bonds. That’s raising concerns about liquidity in the market.
Not So Fast
While the economy is steaming ahead, with the government raising its growth forecasts and predicting a fall in unemployment, there are plenty of risks.
Wage growth, for example, is unlikely to hit the 3.3 percent level that the Riksbank says is needed to boost inflation. Factor in concerns over an excessive appreciation of the krona and political turmoil in Europe and elsewhere, and the consensus is still that an actual rate increase remains very far off.
“We expect the Riksbank to maintain its stance and keep monetary policy highly expansionary for a long time to come, not least as the Riksbank has invested heavily in its conducted policy,” Isaksson said in a note. “We expect an initial rate hike in October 2018.”