Riksbank touts liquidity aid, not rate cuts, to fight virus

Bloomberg

Sweden’s Riksbank signalled it is preparing liquidity measures to protect the largest Nordic economy from the fallout of the coronavirus, but said interest-rate cuts aren’t likely to play a role in any emergency package.
“Our assessment right now is that maintaining the supply of liquidity is the most important thing,” Governor Stefan Ingves said in a statement on Tuesday. “This could be more generous terms for loans to banks and/or direct purchases of securities.”
The announcement came amid reports that Swedish government was also planning to unveil additional spending. The krona strengthened and was trading about 0.7% higher against the euro in Stockholm.
The Riksbank’s apparent determination to avoid lower rates follows a wave of emergency stimulus from some of the world’s biggest central banks, including the Federal Reserve, which delivered a half-point cut on March 3. But since then, the market sell-off has continued, with an oil-price slump adding to the panic. Sweden has “plenty of liquidity in the system” thanks to an existing bond-purchase program, Ingves said.
“In the current uncertain situation it is important that this continues to be the case,” he said. The bank “therefore assesses that the Riksbank’s balance sheet should not be reduced in the coming year. We do not see a lower policy rate as the most important measure at present.”
The bank says liquidity measures are best virus response
Johanna Jeansson of Bloomberg Economics said there’s now little question that the Riksbank will soon unveil more measures.
“It’s become clear the Riksbank will be forced to help stem the economic fallout from the coronavirus,” she said. “We expect the bank to use its balance sheet to counter financial stress and uncertainty through targeted loans or expanded bond purchases already this spring. While we don’t expect a rate cut, there is still a risk Riksbank will be forced to go negative again if core inflation outlook worsens.”
The world’s oldest central bank ended half a decade of negative interest rates in December, despite a slowdown in the Swedish economy. Back then, Ingves said zero was a better vantage point from which to steer monetary policy.
Since then, inflation has moved further away from Riksbank’s 2% target and spread of coronavirus now threatens to damage Sweden’s trade-reliant economy. The government has already warned that the fallout of the virus will wipe 0.3 percentage points off GDP growth.

The Riksbank’s statement arrived as Ingves answered questions in parliament on Tuesday, with much of the discussion centering on possible policy responses to the current crisis.
“We managed the trick of bringing the rate of inflation back to 2% at the same time as it was possible for us to crawl out of negative territory,” Ingves told lawmakers. “That felt good at the time. Now the situation is completely different, and we have to live with that.”