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Swedish Central Banker Says Virus Can’t Be Fought With Cuts

Swedish Central Banker Says Virus Can’t Be Fought With Cuts

(Bloomberg) --

At Sweden’s central bank, the newest policy maker says monetary easing is the wrong way to fight the fallout of the coronavirus.

The comments, which were made shortly before the Federal Reserve delivered an emergency half-point interest-rate cut on Tuesday that failed to restore calm, suggest the world’s oldest central bank is reluctant to take preemptive steps to address risks posed by the virus.

“As it stands today, I don’t feel that we can effectively improve the situation by making monetary policy more expansionary,” Riksbank Deputy Governor Anna Breman told reporters in Stockholm on Tuesday.

Other central banks across the globe have signaled preparedness to act in response to the coronavirus. But the efficacy of such measures was yesterday called into question, after the Fed’s move was followed by a renewed wave of panic once the dust settled on the rate cut.

Economists in Sweden were quick to question the logic of the Fed’s move. “We have [the World Health Organization] giving the advice not to panic over the virus outbreak, then we have a central bank doing just that,” Nordea analyst Henrik Unell said in a note.

The Riksbank has made clear it wants to move away from an era of excessive easing. It ended half a decade of negative rates in December despite a slowdown in the Swedish economy. Since then, some policy makers have signaled they’d rather expand an existing bond-purchase program than once again resort to subzero rates, should there be a need for further stimulus.

Meanwhile, the Swedish government said on Wednesday it has the fiscal room to provide support if the need arises. The finance ministry expects the virus to shave about 0.3 percentage point off economic growth this year. In January, it forecast a 2020 growth rate of 1.1%.

The Right Tools

The Riksbank is “obviously prepared to act if the situation worsens,” Breman said. But monetary policy seems not to be the right tool to tackle the challenges posed by the virus, which have mainly entailed disruptions to the supply side, she said.

Breman said the Riksbank has more tools than just the repo rate and bond purchases if policy makers should suddenly need to act, including the option of providing extra liquidity to support financial stability.

“We have a lot of different measures that we can use,” she said. “We can cut the repo rate back below zero, we can broaden our bond purchases, we can make currency market interventions, we can provide loans to companies via banks, and we can use forward guidance, so there is a lot we can do.”

Some analysts warn that the Riksbank will have little choice but to follow a global wave of emergency easing.

“With almost all international central banks expanding policy, we expect that also the Riksbank will try to show that it is able to act,” SEB analysts Olle Holmgren and Lina Fransson said in a client note. And they’ll probably do that “by announcing increased purchases of government bonds by 20 billion kronor at the meeting on 28 April,” they said.

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

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

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