Late on in yesterday’s session, the Riksbank came out and signalled to markets that it was willing to spend as much as Kr300bn ($30bn), or almost 6% of GDP, from March to December this year on government bonds, municipal bonds and covered bonds. The bank also flagged that it may decide to expand into corporate bonds should it deem necessary. This marks the second batch of stimulus released by the Swedish central bank after Governor Ingves announced $50bn in bank loans back on the 13th March.
By restarting QE, the Riksbank has pledged to almost double its balance sheet. With the number of assets owned by the central bank increasing at a rapid rate, they had to get creative and include new securities in their purchasing programme, hence the inclusion of covered bonds and municipal bonds in their new QE programme. The measures taken didn’t just stop there, however. The bank will also offer out Kr500bn to companies via banks to ensure that a credit shortage will not exacerbate the economic impacts of the virus any further. The Riksbank will offer up to Kr500bn against collateral for onward lending at a 0% rate (variable and fixed to the repo rate which is also predicted to stay at 0% for the foreseeable future) for up to 2-years.
Further measures announced:
- Reduce the lending rate on overnight loans to banks from 0.75 to 0.2 percentage points above the repo rate. The repo rate remains at zero.
- Offer banks to borrow an unlimited amount of money on a weekly basis against collateral at three months’ maturity at an interest rate of 0.2 percentage points above the repo rate.
- Increase flexibility with regard to the collateral banks can use when they borrow from the Riksbank, which will, among other things, give banks more scope to use mortgage bonds as collateral.
- The countercyclical buffer rate, the amount of capital to be held on the balance sheet of banks, is to drop from 2.5% to 0% in order to pre-emptively avoid a credit crunch.
The Riksbank has also announced that they are prepared to take further measures and supply liquidity even between scheduled meetings, while purchases of bonds by non-financial institutions may also be considered.
Given the size and the scope of these measures, it is unlikely the Swedish central bank will dive back into negative rates after they fought long and hard to return the repo rate to 0%. The impact will be supportive of the economy, especially the retail sector given the loan support, and reiterates the global narrative that central banks will continue to deploy all tools at the zero lower bound to provide ample liquidity to support the economy. However, once the dust settles and conditions return to normal, the measures put in place by the Riksbank are likely to keep the currency pinned at weaker levels as the central banks purchasing crowds out potential foreign investment. The krona has sold off over 1.5% against a surging US dollar today, while it is, in fact, flat against the euro on the day.
Author: Simon Harvey, Market Analyst at Monex Canada and Monex Europe.