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World’s Only Escapee From Negative-Rate Trap Isn’t Wavering

Rafaela Lindeberg and Niclas Rolander
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Sweden Gets Heavy Dose of QE to Slow Economy’s Freefall

(Bloomberg) -- Half a year since the Riksbank became the world’s only central bank to engineer an escape from the shackles of sub-zero monetary policy, its officials are in no mood to return there.

Even a pandemic that could shrink Sweden’s economy by more than 6% this year hasn’t swayed the institution from its determination to avoid a measure that it tried so hard to shake off. Instead, officials meeting in Stockholm this week have insisted their balance sheet is the main weapon against the ravages the coronavirus is inflicting on growth.

That resolve sets the Riksbank apart from its four global counterparts from Europe to Japan that stuck to the policy, before the Covid-19 crisis then kept them locked into it for the foreseeable future. The Bank of England has since signaled that it won’t rule out joining that group, despite the potential harm caused to finance industry profits.

“If rates are lowered now, there is a serious risk that a negative policy rate will be permanent,” said Torbjorn Isaksson, an economist at Nordea in Stockholm. “Admittedly a rate cut can’t be ruled out once the economy is on more solid ground. However, our view is that this will not happen.”

The growth shock endured in Sweden stands out as the outcome from what was possibly Europe’s loosest lockdown, which softened the blow. At the same time, the country has suffered among the world’s highest per-capita death rates.

The In Crowd

Like other central banks, the Riksbank has had to inject stimulus to cushion the fallout, and where the Swedes are part of the crowd is in the use of quantitative easing. Officials have pledged to buy 300 billion krona ($32 billion) in government debt, as well as covered and municipal bonds and commercial paper.

Most fixed-income and currency investors polled by SEB predict the Riksbank will expand QE this year, and almost half of them anticipate that move on Wednesday. Officials could extend the program into next year, and could include corporate bonds in due course too.

“Our main scenario is that the Riksbank won’t decide whether to expand the framework until its September meeting, though there’s a chance it already wants to announce a decision, if nothing else to avoid the krona appreciating too much this summer,” said Knut Hallberg, an economist at Swedbank.

What Bloomberg’s Economists Say...

“Sweden’s Riksbank will almost certainly leave interest rates alone in its rate decision on July 1, but we expect the door to be left open for more asset purchases this year.”

-Johanna Jeansson. See her SWEDEN PREVIEW

Policy makers could give some clues this week on how their thinking has evolved on subzero policy, which Sweden exited in December after years of frustration with the tool. Some economists do wonder if their resolve to avoid negative rates may soften.

“We expect the Riksbank to strike a dovish tone, given a weak inflation outlook and fast-paced labor market deterioration, with possible guidance for a rate cut ahead,” Chetan Ahya, Derrick Y Kam and Frank Zhao at Morgan Stanley wrote in a report on Sunday.

Officials have downplayed the likelihood of the deployment of subzero borrowing costs again, citing their harm to pension funds and the risk of banks introducing negative deposit rates on households’ savings accounts, but they haven’t ruled them out.

At the last decision in April, Governor Stefan Ingves was adamant that to “make the best of a bad situation,” the institution needed to fully employ QE for now.

In the neighboring euro zone, European Central Bank officials have also prioritized tools such as QE during the current crisis. But unlike the Swedes, they have kept their deposit rate firmly in negative territory, at -0.5%. Borrowing costs in Denmark and Switzerland are even lower.

While the Federal Reserve has resisted pressure from U.S. President Donald Trump to adopt negative rates, the U.K. is one jurisdiction that has recently signaled a willingness to embrace the idea. Citigroup Inc. predicted earlier this month that the BOE will probably cut its rate to -0.1% by the middle of 2021 if the country fails to secure a trade deal with the the European Union.

What is clear is that every central bank is struggling with the particularly harsh fallout from an unprecedented crisis. Despite Sweden’s relaxed lockdown, the Riksbank is no exception, hence its need to keep all options open.

“There still is a risk of further setbacks and a second wave,” said Swedbank’s Hallberg. “This will continue to impede the economic recovery, which probably will be painfully slow.”

(Updates with Morgan Stanley in 10th paragraph)

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