MNI PREVIEW: Riksbank Seen On Hold, Eyes On QE Signal

The Riksbank looks sure to leave its policy rate at zero at its November meeting, with interest centring on any sign it might boost its quantitative easing programme as it balances firmer economic data with a Covid second wave.

In its Monetary Policy Report, Sweden's central bank is likely to take a similar line to the one it took in September, when it projected that the policy rate would stay at zero throughout the three-year forecast horizon, although individual policymakers left the door open to a cut later on to support recovery. It lifted the policy rate out of negative territory at the end of 2019, opting to focus its response to the Covid crisis on quantitative easing and providing cheap funding for banks.

With firm recent economic data and vaccine optimism balanced by a second Covid wave, the Riksbank could leave its economic forecasts little changed from September, when it foresaw unemployment rising to 9.2% in 2021 as GDP adds 3.7% after a 3.6% fall in 2020.

November may be too soon for an increase in the QE ceiling or a prolongation of the scheme, although this is expected by some analysts at some point in the future. The Riksbank has previously surprised by acting earlier and more actively than consensus assumed, but a lack of government bond market liquidity could stay its hand for the moment, as its holdings approach SEK400 billion.

LIQUIDITY

Its current QE programme allows it to purchase a wide range of securities, including corporate and municipal bonds, for up to SEK500 billion, with the programme scheduled to run through to end June 2021.

Liquidity for covered bonds, investment grade corporate bonds and commercial paper have all improved, a central bank survey of market participants published this month found.

The Riksbank's focus, as Deputy Governor Henry Ohlsson said in a MNI interview, has been to "get out liquidity in the economy so that the market functions well."

Recent data, notably on the jobless front, pointed to an improved recovery with the unemployment rate falling to 8.6% in October from 8.9%. But with the second Covid wave hitting Sweden hard and the government tightening restrictions this month, including a curfew on alcohol sales and lowering the cap on social gatherings, the Riksbank will, like other central banks, have to wrestle with the mix of a darker near-term picture and increased optimism due to the vaccine breakthroughs.

Neither of the Riksbank's earlier alternative scenarios, for either a smooth lifting of pandemic restrictions aboard or else a prolonged Covid crisis, captured what seems to have materialised as the likely path of a strong second wave followed by mass vaccination.