MNI REVIEW: Riksbank Keeps Repo Rate At Zero; No Extra QE

-Riksbank Drops Central Projection Publishes Two Corona Scenarios

-No Collective Rate Forecast; Says Repo Rate Could Be Cut If Needed

By David Robinson

     LONDON (MNI) - The Riksbank left its repo rate unchanged at 0% and will

continue with its previously announced SEK300 billion asset purchase programme,

whilst it dropped its normally published central economic and interest rate

projections due to current uncertainties.

     Market opinion had been divided over whether the Riksbank would act but the

central bank is still in the early stages of implementing a range of measures

announced by the Board in the past seven weeks, including the purchase programme

for up to SEK300 billion worth of covered, government and municipal bonds. It

published two economic scenarios based on how the coronavirus plays out,

eschewing its usual collective rate forecast.

     The following are key points from the Monetary Policy Report and policy

decision:

     -The Board justified its decision to leave policy steady in light of the

number of initiatives it has already launched since the coronavirus hit the

economy and financial markets. It left room for further inter-meeting

announcements, saying that it was keeping policy "constantly under review."

     -In light of the deep uncertainty over how prolonged and extensive the

coronavirus pandemic will be, the Riksbank chose to publish two economic

scenarios in its Monetary Policy Report rather than the usual single central

projection.

     In the more benign scenario GDP was still shown falling rapidly in 2020, by

6.9%, before only partially recovering with a 4.6% rise in 2021. In the more

malign scenario GDP was projected to fall 9.7% this year and to rise just 1.7%

in 2021.

     -The Riksbank did not publish its usual collective rate projection but did

leave the door open to a repo rate cut. It said that it was not making precise

assumptions about various measures but that the monetary policy toolbox would be

used where appropriate and this includes "the potential scaling-up of various

measures and cutting the repo rate."

     -The differences in the growth outturns were assumed to have minimal effect

on inflation, which was assumed to remain weak, with below target outturns

giving the central bank room to add stimulus as required. The target CPIF

measure in the more benign scenario was projected to be 0.6% in 2020 and 1.5% in

2021 and 0.6% and 1.3% respectively in the more malign scenario.

     -The more malign scenario for the coronavirus assumes that there are longer

lasting after effects from the pandemic and a prolonged closing down of

economies. In this scenario it warned of the risk of turbulence in financial

markets as doubts rise over the sustainability of public finances in parts of

the euro area, with knock on consequences for financial stability and high

unemployment.

     In this scenario it said monetary policy would likely be even more

expansionary and "may lead the Riksbank to scale up measures that have already

been implemented and/or to cut the repo rate."

     -Rather than producing a three year central forecast, the Riksbank showed

the repo rate steady for a year ahead and made the case that it should be cut to

boost the recovery, when it starts, rather than in the contractionary phase,

when it could add to the problems faced by the banking sector.

     "Keeping the repo rate at zero now does not rule out the possibility that

it may be cut later on to stimulate demand in the recovery phase," it said .

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

[TOPICS: MT$$$$,MX$$$$]