MNI POLICY: Riksbank Minutes Show Members Open To Later Cut

-Riksbank Board Members See Rate Cut Supporting Recovery, No Cut Now

By David Robinson

     LONDON (MNI) - Riksbank Executive Board members agreed that a rate cut

could be deployed to support the economy when its recovery began rather than

during the present sharp downturn, minutes of its Apr. 27 monetary policy

meeting showed, without highlight any deep divisions.

     The board backed the roll out of asset purchases and left the repo rate at

zero percent, having only lifted it out of negative territory at the end of 2019

after almost five years in negative territory.

     -Board members "did not want to rule out the possibility of the repo rate

being cut later on to stimulate demand in the recovery phase, and thereby

safeguard price stability."

     This approach, out of synch with that of other central banks, appears to

have widespread support at the Riksbank.

     -Deputy Governor Martin Floden said "There are indeed factors that suggest

that a policy rate cut would not be an effective way of conducting monetary

policy."

     "The increased uncertainty and stress on the financial markets mean that

asset purchases, primarily purchases of mortgage and corporate bonds, have

become more effective and more justifiable," but he added that circumstances

could change and he did not rule out a cut when consumption began to strengthen.

     The policy rate is close to its effective lower bound and there is evidence

that rate cuts are less effective when markets are impaired.

     -Deputy Governor Per Jansson, who before the onset of coronavirus was the

most dovish of the current members and opposed the December rate hike, made the

case for a cut later in the pandemic cycle, but said "our main focus at present

is not on the repo rate and the repo rate path."

     "Each adjustment to the repo rate must be considered very carefully so as

not to unnecessarily waste the ammunition we have left. My view is that the

conditions for repo rate cuts will improve when the rate of spread of the virus

starts to decline and society gradually begins to open up," he said.

     -Governor Stefan Ingves described what the Riksbank was doing as is close

to liquidity insurance. It has announced a notional SEK300 billion ceiling on

asset purchases which it rolling out across government, corporate and municipal

bonds and corporate paper.

     "We have created a safety-net, a kind of insurance against extremely bad

outcomes, and helped to keep interest rates down. All these measures, which are

basically aimed at ensuring there is enough liquidity in the economy, are

classic central bank measures," he said.

     -Ingves downplayed the importance of the Riksbank's economic projections,

with the central bank looking at scenarios rather than focussing on a single

collective projection.

     "For economic forecasters, the task is almost impossible. Every scenario

for the spread of the virus is associated with several possible development

paths for economic activity," Ingves said.

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