Sweden’s new bond-buying plan to stave off falling prices could trigger a round of money printing by its fellow non-eurozone neighbors aimed at thwarting untimely currency rises against the weakening euro, analysts say.
The Swedish central bank’s historic cut of its base-interest rate to minus-0.1 percent on Thursday was accompanied by the first outright quantitative easing (QE) program adopted by a smaller economy.
Sweden’s move comes as central banks across Europe are fighting to stop their economies from slipping into damaging deflationary cycles that could be difficult to reverse.
“What we’ve seen since the end of 2014 and the start of this year is a type of chicken race between central banks. Several of them have chosen to lower interest rates and expand their balance sheets,” bank SEB chief economist Robert Bergquist told reporters.
Sweden on Friday announced it would buy 10 billion kronor (US$1.18 billion) of bonds with maturities of between one and five years — a policy often considered a last-ditch attempt to revive a stagnating economy.
By contrast, Sweden intends to use the program to take aim at a more specific threat: deflation.
Prices in Sweden have been stagnant since 2012 but have yet to start falling, which could trigger a dangerous cycle where consumers hold off purchases and demand drops forcing companies to cut jobs and stifling economic growth.
“Sweden’s only reason is this fear that a weaker euro might result in high deflation pressure,” Danish Sydbank analyst Peter Bojsen Jakobsen said.
The Nordic country is far from the eight-year stagnation that led Japan to pioneer quantitative easing in 1998, yet Swedish central bank Governor Stefan Ingves said last week that more expansionary moves could lie ahead.
Some analysts have criticized the move.
“It sends a crisis signal and the Swedish economy is not in crisis,” Nordea bank chief economist Annika Winsth told reporters. “A free lunch will cost you in the long run.”
Economists are also worried it might impact Sweden’s levels of household debt, which are among the highest in the world.
Bojsen Jakobsen questioned “whether it’s necessary for Sweden to introduce an even larger program in a situation where the credit growth is doing quite well, some might say too well, private consumption is growing, and everything is pointing toward decent growth.”
At only 0.3 percent of GDP, the Swedish purchase is minimal compared with the European Central Bank’s 1.14 trillion euro (US$1.3 billions) stimulus package unveiled last month. However, Sweden’s program can still have regional spillover effects.
Denmark’s central bank — which has kept its deposit rate below zero for more than six months and lowered it further last week — might see quantitative easing as a tempting tool to reach for after the Swedish decision.
“If the currency peg remains under pressure I would guess [bond-buying] has got to be towards the top of the list of policy options for Denmark,” Capital Economics London-based analyst Jonathan Hoynes said.
On Thursday, the Danish krone shot up on the back of the Swedish announcement, an unwelcome effect in a country whose central bank in January spent six percent of GDP to keep the currency down.
“Sweden’s example could cause Denmark to follow,” Hoynes said.
In Norway, although inflation has not reached the 2.5 percent annual target since 2010, it is still far from flatlining at 2 percent. The central bank also has room to cut its interest rate, which sits at 1.25 percent after a downward nudge in December last year.
However, the Norwegian krona dropped one percent on Thursday’s news of Sweden’s decision.
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