Interest rate note in historical decline

The Governor of the Riksbank Stefan Ingves has opened the door for more exceptional measures, with the promise two weeks ago that the Riksbank will “do what is required” in the corona crisis.

But only a few economists in a recent survey conducted by Reuters believe this is paving the way for it to now be a rate cut to minus again, after the disputed hike to zero in December. Four out of 25 respondents in the survey expect Stefan Ingves and his management to choose to increase the support purchases instead.

Most people seem to reason that the Riksbank's wide bomb mat of measures so far in the crisis goes a long way and that the Riksbank's Executive Board may only settle for lowering the forecast for the policy rate in the future.

So far, the Riksbank's crisis management has received good ratings from the market participants, according to a survey by SEB. An overwhelming majority of respondents think that the measures have had a positive impact on the market's functioning in the crisis, according to SEB's interest rate strategist Lina Fransson.

She expects that, in view of the 67 billion support purchases made in April, the Riksbank can now decide to double the support purchase program from SEK 300 billion to SEK 600 billion this year.

- The last thing they want in this situation is that interest rates go up for households, she says.

- We believe that they will continue to buy a very large proportion of housing bonds, while we see an increased supply of government bonds, which also means that the Riksbank will want to buy some there, she adds.

The Riksbank already holds about 53 percent of the outstanding stock of government bonds, after just over five years of buying them, according to SEB. And with the purchase of Swedish housing bonds of SEK 50 billion in April, 3 percent of this market segment is also included in the balance sheet.

The Riksbank has also purchased corporate certificates, ie short-term liquidity loans to companies, for SEK 5 billion in April. This corresponds to 3 percent of the outstanding certificates.

In addition, the Riksbank has a plan for the purchase of municipal bonds for SEK 16 billion, for three months from the end of April. This would, if completed, give the Riksbank a share of approximately 4 percent of the outstanding stock of Swedish municipal bonds totaling approximately SEK 380 billion.

Professor Karolina Ekholm, former Deputy Governor, is generally skeptical of central bank purchases of bonds and certificates with high credit risk from companies. She warns that it gives the central bank a strange role, where the authority's decision directly determines how credits are distributed in the economy.

"And to the extent that this leads to losses, they will be borne by the taxpayers," she adds in an email to TT.

However, the Riksbank had wanted to buy even more corporate certificates than they have been able to buy so far. They have made four offers for purchases of SEK 4 billion at a time, ie a total of SEK 16 billion.

However, the short maturities and a relatively small secondary market have set the bar, according to Lina Fransson.

- The interest rate that the Riksbank has been able to offer has not been attractive enough, she says.