Just hours after the Bank of Japan “adjusted” its forward guidance, saying it will keep extremely low rates at least through around spring in 2020, Sweden’s Riksbank joined the global dove procession when it finally capitulated on its hawkish rate hike plans, saying it would hold its main rate steady longer than previously expected while announcing an 18-month extension to its QE program to start from July, becoming the latest major central bank to reverse dovishly on monetary policy as a result of the global economic slowdown. The Swedish Krona tumbled as few in the market expected such an aggresively dovish announcement.
The Riksbank, which in addition to keeping its repo rate at a -0.25% as expected, said it will purchase government bonds for a nominal value of SKr45 billion (€4.2 billion) from July until December 2020, an amount that corresponds to around half of the principal payments and coupons that the Riksbank will receive from the bond portfolio during that period, and saying that “the purchases will take place in order to maintain an appropriate level of holdings and the Riksbank’s presence in the market.”
It also extended its dovish forward guidance, saying that its benchmark interest rate will remain at minus 0.25 per cent “for a somewhat longer period of time than was forecast in February.”
As Bloomberg notes, “relying on exports for about half its economic output, Sweden has started to feel some of the weakness that’s gripped the euro zone. And with the European Central Bank forced into a more dovish position, policy makers in Stockholm have had little choice but to follow its retreat. The ECB expects its key rate to be unchanged at least through 2019. In the U.S., the Federal Reserve has halted its hiking cycle.”
The dovish announcement surprised markets, and the Swedish krona, which had fallen about 0.2% just before the announcement, extended that drop to a 1.2% decline against the euro, in line for its worst day since November 2017, while the USDSEK soared by 1.3% to 9.56, the currency’s lowest against the dollar since 2003.
Behind the violent reaction is that analysts had expected the Riksbank to stick with their (prior) pledge to move away from negative interest rates and spur a rally in the Swedish currency; clearly that is no longer happening especially if global economic headwinds accelerate.
David Oxley, senior Europe economist at Capital Economics, said: “A dovish shift in its policy stance has taken the market by surprise.”
Robert Bergqvist, chief economist at SEB in Stockholm, characterized the overall message as very dovish. Bergqvist said the Riksbank’s comments signal that it’s “worried” and taking a “clear step in a softer direction” as a result.
Riksbank rate decision: We expected a dovish statement – and it was dovish indeed! Riksbank says rate hike could come at end 2019 or early 2020. We expect April 2020. Riksbank confirms now it cannot tolerate that inflation deviates too much from 2% target. Poor Swedish krona… pic.twitter.com/cGngDmYYVn
— Robert Bergqvist (@BergqvistRobert) April 25, 2019
Commenting on the move, Nordea’s chief analyst Martin Enlund said on Twitter that the “Riksbank’s krona-killing machine [has been] reactivated”, adding that the central bank’s balance sheet will be “larger at the end of 2020 than at the beginning of 2019. We suspect related QE flows have been an important driver of SEK weakness (the krona-killing machine).”
🇸🇪🍌👑$SEK: Riksbank’s krona-killing machine re-activated
– #Riksbank balance sheet to be larger at the end of 2020 than at the beginning of 2019
– We suspect related QE flows have been an important driver of SEK weakness (the krona-killing machine)
– #EURSEK resistances 10.70/73 pic.twitter.com/NW1fuVGREi
— Martin Enlund 🦆🚁 (@enlundm) April 25, 2019
The central bank did not completely abandon the hawks, however, saying “The repo rate is expected to be raised again towards the end of the year or at the beginning of next year and rate rises thereafter are expected to occur at a somewhat slower pace,” although judging by the market reaction few actually believe it.
The Riksbank decision is similar to the global dovish tilt observed from other central banks, especially the Fed, the ECB, and most recently, Canada which on Wednesday also joined the dovish debacle by pausing future rate increases.
But what is strange is that the dovish capitulation took place only amid a relatively modest decline in the bank’s economic forecasts: the Riksbank now predicts economic growth for 2019 at 1.3%, down from a 1.5% forecast in its December monetary policy report, the bank said in February.
It’s almost as if the central bank no longer believes its own projections…