MNI PREVIEW: Riksbank Weighs Risk Of Return To Negative Rates

By David Robinson

     LONDON (MNI) - The Riksbank meets on Tuesday with economic confidence

teetering under the effects of coronavirus, but with some committee members'

known to fear that any return to a negative repo rate would have significant

side effects for economic health.

     The Swedish central bank only ended a near five-year negative rate spell in

December, hiking the policy rate 25 basis points to zero. At the time

policymakers debated possible distortions if negative rates were perceived to be

semi-permanent and any prospect of a return to negative territory at this

meeting would reignite the arguments.

     Following are key points ahead of Tuesday's announcement:

     -The Riksbank has already sanctioned a fresh SEK300 billion of quantitative

easing in response to the pandemic, with asset purchases set to range across

government, municipal, mortgage and corporate bonds and commercial paper.

     The central bank is still rolling out this programme. The purchases of

SEK15 billion of municipal bonds were only scheduled to start on 27 April and

will run to 30 June 2020.

     It is still early days in the other asset buying programmes and it is not

clear that the Riksbank will see the need to raise the SEK 300 billion target

stock of QE at this stage, with analysts and market participants divided on the

question.

     -The Riksbank has more experience than most in running negative rates and

it found that in the main rate cuts were passed on and banks' deposit rates

stayed positive.

     The December policy meeting, however, showed some committee members were

concerned about the implications of making negative rates an enduring feature of

the landscape, with fears that banks would eventually succumb and set negative

savings rates, pushing savers into riskier assets.

     Deputy Governor Anna Breman said that "a long period of negative interest

rates may have negative side effects on the economy .. This is a parameter that

we should take into account."

     First Deputy Cecilia Skingsley, however, noted that Swedish rate setting

was constrained by policy elsewhere and that it was "probable that the repo rate

could become negative once again."

     -The resilience of the Swedish krona will make it easier for the central

bank to add stimulus if required.

     Sweden is an open, export intensive economy, but the krona has held up well

in response to the global coronavirus shock, supported by dollar swap-lines and

reduced volatility.

     The trade-weighted exchange rate index, the KIX, was 123.23 on Apr.24, just

0.8% weaker compared with late February when asset prices began to reflect virus

fears.

     The Riksbank policy decision will be announced at 08:30 BST.

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

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