Riksbank likely to extend bond purchase program until 2016-end

The minutes of Riksbank's latest meeting suggests that the central bank has become less inclined to undertake more measures to accelerate inflation. Nevertheless, the central bank does not seem to be done, mainly due to the krona. According to the minutes, the action to further cut interest rate in February happened with certain anxiety. Moreover, Sweden's inflation in January was more than expected with signs of an uptick in domestic inflation. However, the uptick in inflation is fragile, while a rapid appreciation of the krona might still create issues for the central bank.

Additional measures are likely required if the central bank is to avert a sharp appreciation and secure a smooth and slow strengthening of the currency in line with its forecast. Even if the krona is not a current issue, it will become a problem in the longer term if the central bank remains sidelined.

A lot of it depends on the ECB, which is likely to lower rates and expand its asset purchase program in March and in June. Much of the action to be undertaken by the ECB has already been priced in; however, the Riksbank should balance the ECB's measures to cut investor demand for the krona. One of the obvious choices that the Riksbank has is to permit printing money for little longer.

"In our new forecast, we assume that the bank extends its government bond purchase programme until year-end, by SEK 50bn to a total of SEK 250bn. The bank is also expected to buy index-linked bonds for SEK 15bn", says Nordea Bank.

The Riksbank is likely to announce expansion of purchases during its meeting in April. The current program, which comprises SEK 200bn in nominal government bonds, ends in June 2016.

In order to keep the krona in check, additional measures are needed. The risk scenario for the ECB is such that it might undertake additional measures than expected in the baseline scenario. This contributes to the risks to the projection for the Riksbank being skewed in the same direction.

The measures to be taken in such scenario depend partly on the circumstances. Interest rates seemed to have bottomed out. Meanwhile, the operational monetary policy framework might be altered. There is likelihood for purchasing additional index-linked bonds and municipal bonds.