Sweden Turns to Negative Interest Rates and QE to Elevate Inflation

Talking Points:

• On Thursday, The Riksbank lowered Sweden’s Repo Rate to -0.10%
• As an Additional measure the central bank will buy bonds equivalent to SEK 10 billion
• At the time of the announcement, the Krona depreciated 2.5% against the US Dollar, bringing the USDSEK to a new multiyear high

Effective from February 18th the repo rate, as set by the Riksbank, will be -0.10%. In lowering the rate from zero, Sweden’s central bank maintains their inflation targeting policy for the purpose of price setting and wage formation. The decision to impose negative rates comes despite pursuing an expansionary monetary policy in 2014; the committee feels that inflation is still not responding quickly enough to previous measures.

As a result, in addition to lowering rates, the Riksbank will purchase government bonds equivalent to SEK 10 billion. The maturities will range from 1 to 5 years. Given the latest round of stimulus measures, CPI is now expected to reach 0.3% in 2015 and 2.0% in 2016, up from the December forecast of 0.1% and 1.9%. Inflation with a fixed rate mortgage is expected to fare better, reaching 1.0% in 2015 and 2.0% in 2016.

In reaching this mid-term inflation target, the Riksbank does not expect to raise rates until the second half of 2016. The next inflation report is scheduled for Tuesday, February 17th.

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