Sweden fights currency gains with more monetary stimulus

Bloomberg

Sweden’s central bank will buy more bonds to drive down longer yields as policy makers try to fight currency gains that threaten to undermine their efforts to rekindle inflation.
The Riksbank kept its benchmark repo rate at minus 0.5 percent, it said on Thursday.
The decision was expected by all 20 economists surveyed by Bloomberg. It will add 45 billion kronor ($5.6 billion) to its quantitative easing program, including inflation linked bonds, to be purchased during the second half of the year.
“With continued expansionary monetary policy abroad, there is a risk that the krona will appreciate earlier and faster than in the forecast,” the Riksbank said in a statement. “This could dampen growth and inflation in Sweden and affect confidence in the inflation target.”
The krona initially traded as much as 0.8 percent higher against the euro, but gains were pared to 0.4 percent as of 9:55 a.m. in Stockholm. Michael Grahn, an analyst at Danske Bank A/S, said the currency reaction was “rather strange.”
“One would think it would weaken, but I think this has to do with the market having expected an even bigger expansion of QE,” he said.
Andreas Wallstroem, an economist at Nordea Bank AB, said his “main scenario is that we will see no additional easing measures from the Riksbank in this cycle.” Nordea forecasts the first rate increase will come in the second quarter of next year. “However, as we don’t see that inflation will rise to the 2 percent target within the forecast horizon, further easing measures cannot be ruled out.”
He noted that measures by other central banks will be key in determining the Riksbank’s policy. The European Central Bank is due to publish its rate decision later, with economists surveyed by Bloomberg predicting it will keep rates unchanged. “Although inflation is rising, the upturn is fitful,” the Riksbank said. “At the same time, there is still uncertainty over global developments and monetary policy abroad is very expansionary.”