MNI INTERVIEW-2: Riksbank Could Broaden QE In Next Downturn

-Second Part Of Riksbank's Cecilia Skingsley Interview

-Skingsley Rejects Claim Riksbank Went Beyond Zero Lower Bound

-Says Riksbank Has Policy Tools For Next Downturn; Could Buy Wider Range Of

Assets

By David Robinson

     STOCKHOLM (MNI) - Sweden's central bank is likely to return interest rates

to negative levels and could broaden quantitative easing beyond government bonds

in future downturns, Riksbank Executive Board member Cecilia Skingsley told MNI,

rejecting a claim that that its recent easing cycle lowered rates so much they

exerted a contractionary influence on the economy.

     "I don't think this is the last time we will be sitting with negative

policy rates. Although we have a forecast that we are going into positive

territory within a year or so I think in future downturns we are going to spend

some more time in negative territory and with QE," she said in an exclusive

interview on Tuesday.

     Skingsley is open to the possibility that the next round of QE could extend

beyond government bonds.

     "If there is a threat to the price stability objective ... we will have to

think about widening the pools of assets."

     "It is not a forecast. It is not a current issue but it was certainly

discussed when we were in the purchasing programme if we need to expand the

purchasing universe," she said, declining to elaborate on what other assets

might be bought.

     She said that the -0.5% low point in the Riksbank's last easing cycle was

not the zero lower bound, and denied a suggestion, made in recent work by

high-profile economists, that Sweden's experience showed setting a negative

interest rate on reserves can reduce bank profits and result in a contractionary

effect on output.

     --SWEDEN WELL PLACED

     With the key policy rate still in negative territory, at -0.25%, if the

current easing in global growth were to turn into something more malignant the

Riksbank could find itself scrambling to find options for stimulus.

     Skingsley said Sweden is well placed as fiscal and monetary policy can act

together, as the country only has a debt-to-GDP ratio of around 35%.

     "The repo rate path also acts as a policy tool because you can lower the

path and as I said I don't think we reached the effective lower bound. So I

believe there is room to cut if we find that is needed," she said.

     In a 2017 paper examining Swedish data, Gauti Eggertsson, former U.S.

Treasury Secretary Larry Summers and others claimed to have "documented a

disconnect between the policy rate and lending rates once the policy rate fell

below zero" and that "negative policy rates were at best irrelevant but could

potentially be contractionary."

     According to this theory, when the Riksbank raised its policy rate to

-0.25% from -0.5% in December it might actually have eased policy and added

stimulus.

     While Skingsley said the research was likely to be relevant to future

policy setting, she said it had looking at listed, or quoted, rates advertised

by banks, rather than actual rates on the stock of loans and deposits.

     Looking at quoted rates "there didn't seem to be a full pass-through from

the last rate cut," she said, "But if you look at it from ... (the) perspective

of what the mortgage holders actually paid, my interpretation is that there is a

satisfactory pass through."

     --DIDN'T HIT ZERO LOWER BOUND

     "Yes, there were delayed responses and we are thinking about that but I

don't see this interpretation that we hit the lower bound, no," she added.

     "I don't have a strong view on where the effective lower bound is but ...

it wasn't at -0.5%," she said.

     Skingsley has also spearheaded work to develop a central bank digital

currency, the e-krona, although she said that this would not allow for more

deeply negative interest rates. Some have argued that savers can dodge negative

rates by stockpiling cash, but Skingsley said she does not believe physical

money will disappear.

     "I don't think that notes will go away. I think this idea of getting rid of

cash because then you can really go deep down with the policy rate is the sort

of thing you come up with in theory but you should be very careful what concepts

you actually push on to people and society," she said.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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