Riksbank expands QE more than expected as Covid threat grows

Sweden’s central bank surprised markets with a bigger-than-expected expansion of its asset purchase program, amid signs the Covid crisis will do more damage to the largest Nordic economy than previously feared.

Photo: Riksbank

The Stockholm-based Riksbank, which kept its main interest rate at zero as expected, said it will expand its quantitative easing program to 700 billion kronor (USD 82 billion), which is 200 billion kronor more than its earlier target. It also said the repo rate will probably stay at zero in “the coming years.”

"The coronavirus pandemic is continuing to dominate developments in the global economy," the bank said in a statement on Thursday. "Growth forecasts have been revised down for the coming six months, for Sweden and abroad. Inflation prospects are also assessed as a little weaker over the coming years."

In Thursday’s statement, the Riksbank not only expanded its QE target, but also said it will step up the pace of asset purchases next quarter.

The krona fell about 0.4 percent against the euro. Economists at SEB, one of Sweden’s biggest banks, had predicted a 100 billion-krona QE expansion, while others had expected no change in policy.

Policy Mix

Governor Stefan Ingves has repeatedly underscored his preference for asset purchases over rate cuts to support the economy. The Riksbank ended half a decade of negative rates almost a year ago, and Ingves has shown a reluctance to delve below zero again, amid financial stability concerns.

But Sweden is now bracing for a dark winter as the pandemic spreads, intensive-care beds fill up and curbs on movement increase. The government has already warned that the next few months will be tougher on the economy than first feared.

As signaled in previous statements, the Riksbank said the repo rate "can be cut if this is assessed to be an effective measure, particularly if confidence in the inflation target were to be threatened."

Meanwhile, inflation remains well below the Riksbank’s 2 percent target, coming in at just 0.3 percent in October.

Sweden’s controversial decision to avoid a lockdown has coincided with considerably more Covid deaths than in the rest of the Nordic region. On Wednesday, the country’s statistics office predicted that the virus will reduce Swedish life expectancy this year, after more than a century of almost uninterrupted growth.

In Thursday’s statement, the Riksbank cut its forecast for gross domestic product this year and now sees a contraction of 4 percent, compared with 3.6 percent previously. The rebound in 2021 will also be smaller than earlier thought, with growth seen at 2.6 percent, compared with the 3.7 percent seen earlier. Inflation will remain below the bank’s 2 percent target throughout the forecast period, which extends into 2023.

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