EUR/SEK: Policy Chess

On 2 July, Riskbank reduced its benchmark repurchase agreement rate to -0.35% from -0.25%, and also extended its ongoing asset purchase program by about £3.5 billion, citing , “...uncertainty abroad has increased and it is difficult to assess the consequences of the situation in Greece... ...the krona has also become stronger than the Riksbank had forecast and the development of the exchange rate remains a risk to the upturn in inflation...”

At the 3 September meeting, Riksbank’s Executive board decided to maintain the policy rate at -0.35% as well as the asset purchase program citing , “...Even though uncertainty continues to be high internationally, the economic outlook and inflation prospects remain largely unchanged since the monetary policy decision published in July... ...The expansionary monetary policy... ...is supporting the continued positive development of the Swedish economy...” However, the board concluded the statement with the caveat that “...Riksbank remains highly prepared to make monetary policy even more expansionary in the event of inflation prospects deteriorating...”

Lastly, on 28 October the Executive Board decided to leave the policy rate unchanged at -0.35% but expanded the asset purchase program by nearly £4.93 billion, stating that , “...there is still considerable uncertainty regarding the strength of the global economy and central banks abroad are expected to pursue an expansionary monetary policy for a longer time... ... Compared with the previous assessment, inflation is expected to be a little lower in 2016 and 2017...” It’s important to observe here that Riksbank’s decision came six days after the ECB implied that an expansion of its asset purchased program may be warranted.

Riksbank has good reason to be concerned about external events. It’s over 30% of its export destinations are Eurozone members and well over 50% of exports are destined for fellow EU members, other European nations and Russia. Together, Eurozone, non-Eurozone, other European nations and Russia account for nearly 80% of its imports. Specifically over 10% of Sweden’s exports are crude petroleum, petroleum derivatives or iron ore. Similarly, nearly 13% of imports are crude petroleum (or derivatives of) and a wide array of electronics. Hence the relative value of the Krona to other European currencies has a significant effect on the Swedish economy.

Indeed, although the 28 October Statement did not explicitly mention the ECB, an examination of Sweden’s trade network would certain imply that Riksbank’s Executive board members were scowling in the direction of Brussels. The 28 October statement goes on to note that, “...The recovery abroad is continuing but there is uncertainty regarding the strength of the global economy. Compared with previous forecasts, inflation abroad is deemed to be slightly lower and many central banks are expected to pursue an expansionary monetary policy for a longer time..." Swedish monetary policy needs to take this into consideration. Otherwise the krona risks strengthening earlier and more rapidly than forecast, which would lead to a slower increase in the prices of imported goods and services and lower demand for Swedish exports...”



Riksbank’s concerns may be well founded. It’s noteworthy that the 2 July Riksbank policy rate reduction and QE expansion preceded the ECB meeting by about two weeks. The statement at the 16 July ECB meeting had an encouraging tone , which may have influenced Riksbank’s decision to maintain policy at the following 3 September meeting. Mr. Draghi had stated: “... the asset purchase programmes continue to proceed smoothly. As explained on previous occasions, our monthly asset purchases of €60 billion are intended to run until the end of September 2016... ...the information that has become available since the Governing Council meeting in early June has been broadly in line with our expectations... ...Recent developments in financial markets... ... have not changed the Governing Council’s assessment of a broadening of the euro area’s economic recovery and a gradual increase in inflation rates...”

The next ECB meeting and Riksbank policy meeting happened to occur on the same day, 3 September. This time, the ECB statement may have put the Riksbank Executive board ‘en garde’: “...The information available indicates a continued though somewhat weaker economic recovery and a slower increase in inflation rates compared with earlier expectations... ...renewed downside risks have emerged to the outlook for growth and inflation... ...the Governing Council... ...emphasises its willingness and ability to act, if warranted...”
Riksbank’s may have anticipated the same uncertainty but also may have held the same view that the collapse of oil and other commodity prices may perhaps be transitory, and thus the ECB would maintain policy. Riksbank’s decision to maintain policy reflected that view.

The most recent meeting may have been the deciding factor for Riksbank. At the 22 October ECB meeting President Draghi made it clear that more easing measures were being considered: “...concerns over growth prospects in emerging markets and possible repercussions for the economy from developments in financial and commodity markets continue to signal downside risks to the outlook for growth and inflation... ...In this context, the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting...” Riksbank responded at its meeting a week later by expanding their asset purchase program.

Most recently, at the regularly scheduled testimony to the EU Parliament on 12 November, President Draghi gave the strongest indication yet, of the necessity of expanding QE: “...However, downside risks stemming from global growth and trade are clearly visible... ... In addition, price pressures – such as from producer prices – remain very subdued...” The next Riksbank Executive Board meeting is scheduled for 14 December. It’s reasonable to expect, whether the ECB changes policy or not, Riksbank’s Executive Board will not allow itself to be ‘placed in check’ and act regardless of the ECB decision.