MNI REVIEW: Riksbank On Hold; Door Ajar To Negative Rates

The Riksbank left policy on hold at its September meeting, noting an uncertain recovery from the Covid-19 pandemic lay ahead and that the key repo rate was likely to remain at zero throughout its three-year forecast period, although more accomodative policy remains an option if needed, .

Having only moved away from negative rates last December, the Riksbank has opted -- for now, at least -- not to go back into negative territory and has instead sought to reassure markets by conducting both a prolonged SEK 500 billion asset purchase and low cost bank lending programs. The September decision showed it sticking with this approach, although negative rates remain in the policy toolbox.

The Monetary Policy Report projections, published alongside the rate decision, showed the repo rate holding at 0.0% through to the end of the forecast period in Q3 2023, with inflation running below the 2.0% CPIF target throughout. CPIF was forecast to rise from 0.5% this year to 1.2% in 2021 and 1.3% in 2022.

NEGATIVE RATES

Although not opting for negative rates at present, the board made it clear in the text of the MPR that they were not ruling out a return to sub-zero rates if need be.

"The possibility of a repo rate cut cannot be ruled out if it is judged effective, particularly if confidence in the inflation target were under threat," policymakers said.

A number of factors will determine whether to go negative including how the krona exchange rate evolves and how a lower policy rate would impact interest rates in general.

FISCAL LEVERS

The Riksbank put the spotlight back on fiscal policy to do the heavy lifting of supporting demand while it can stabilise financial markets.

"Demand in the economy can be effectively supported with fiscal policy, as public finances in Sweden are strong and interest rates are low. Monetary policy has plenty of scope to manage problems that might arise on the financial markets, such as poorer credit supply or rising risk premiums that push up interest rates met by households and companies," it said.

GDP in the central scenario was shown falling 3.6% in 2020, up from its previous estimate for a 4.5% fall.

While publishing a central scenario, the Riksbank also set out a couple of alternative ones highlighting the uncertainty surrounding the development of the Covid pandemic. In one there was a strong, second Covid wave later this year but this does not result in full national lockdowns, while in the second assumed a more rapid rebound in economic activity than in the central scenario.

One of the most striking things about the alternative scenarios was that there was little difference to growth this year but a vast difference between estimates for 2021.

With the technical assumption that in both case monetary policy would remain the same as in the central scenario, with no tightening or return to negative rates. In the adverse scenario GDP was shown falling 4.9% in 2020 before rising 1.2% in 2021 while in the rosier scenario it falls 3.3% in 2020 before rebounding with a 6.0% rise next year.