Sweden’s central bank lowered its main interest rate deeper into negative levels and expanded its bond purchases to the end of the year as the turmoil in Greece raises the specter of further krona gains.
The repo rate was cut to minus-0.35 percent from minus-0.25 percent, the Stockholm-based Riksbank said in a statement. A reduction was predicted by four of 18 analysts in a Bloomberg survey, with the remainder forecasting no change.
The bank expanded its bond purchasing program by 45 billion kronor (US$5.33 billion) to the end of year, adding to the 80 billion kronor to 90 billion kronor already announced.
“Inflation is rising and economic activity in Sweden is continuing to strengthen,” the bank said. “But uncertainty abroad has increased and it is difficult to assess the consequences of the situation in Greece. Since the repo-rate decision in April, 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.”
Swedish policymakers have unleashed unprecedented measures this year to jolt the largest Nordic economy out of disinflation. They were forced to respond after record stimulus by the European Central Bank (ECB) threatened to drive up the value of the krona and further hamper their fight to bring back price growth, which has been near zero since the end of 2012.
The krona slumped as much as 1.1 percent, and was down 0.8 percent to 9.336 per euro as of 9:57am in Stockholm yesterday.
The bank said it has “a high level of preparedness” to add stimulus and reiterated it can also “intervene on the foreign exchange market if the upturn in inflation is threatened as the result of, for instance, a very problematic development in the markets.”
“The purchase of other types of securities and the launch of a company lending program via the banks may also come into question,” the Riksbank said.
Most analysts had expected no change after an unexpected pick-up in inflation in May provided some relief to policymakers.
A survey last month also showed five-year inflation expectations — a key gauge for the bank — rose for the first time in four years.
The bank kept its repo rate unchanged in April after two cuts earlier in the year. Policymakers instead stepped up their fight by raising the bank’s bond buying by 40 billion kronor to 50 billion kronor, adding to the 40 billion kronor in purchases announced since February.
The moves earlier this year had limited success in keeping the krona from strengthening against the euro, as the ECB’s own bond purchases and the turmoil in Greece weigh on the common currency. Before yesterday, the krona was up more than 2 percent against the euro this year.
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