On Thursday Sweden’s central bank cut its main interest rate into negative territory for the first time and announced a bond-buying program, joining a widening group of central banks trying out unconventional measures to battle low inflation.
The Swedish krona declined versus the euro in response to the move.
The Riksbank lowered its benchmark rate to minus 0.1% from zero and said it would buy government bonds worth 10 billion Swedish kronor ($1.2 billion). The repo rate had stood at zero since October, says The Wall Street Journal. The Riksbank targets 2% inflation.
Analysts' opinions were split ahead of the rate decision about which way it would go. A small majority expected unchanged rates while others had forecast the repo rate could be cut as low as minus 0.25%.
The Swedish krona weakened against the euro, which rose to around 9.65 kronor from 9.50 kronor, as a response to the news.
Sweden’s two-year bond traded at a yield of minus 0.23% after the decision compared with minus 0.18% before. The bond is more responsive to monetary policy changes than longer-dated bonds.
Analysts were initially underwhelmed by the scale of the bond-buying program, known as quantitative easing, but noted the Riksbank’s comment that it is ready to do more in between scheduled meetings.
“Give me 10 billion kronor and I’ll say thank you very much but it’s the smallest quantitative easing ever,” said Société Générale analyst Kit Juckes.
SEB analyst Carl Hammer said he thought 10 billion kronor could be “just the beginning,” noting “they left the door open.”
As well as cutting the repo rate, the central bank reintroduced rates for what it calls its fine-tuning operations at 0.1 percentage point either side of the repo rate. The lower rate, at -0.2%, functions like a deposit rate with the central bank, while the higher rate, at zero, functions like a lending rate. Having to pay a deposit rate equivalent of 0.2% discourages commercial banks from parking money with the Riksbank.
