Sweden Surprises with Another Rate Cut

Market Trends - 18/03/2015

Sweden again surprised investors today with another rate cut, treading further into the negative interest rate party started by Switzerland by taking the key rate to -0.25% from -0.10%. Accompanying the rate cut was an announcement to enter the quantitative easing party with the plans to buy SEK 30 billion in government bonds. This very direct intervention in monetary policy highlights the increasing strain felt by European economies as deflation drags on growth. The aggressive monetary policy measures are intended to offset recent strength in Krona against the Euro as Sweden seeks to maintain its export competitiveness. Any rapid appreciation in the Krona threatens to undo recent gains in the economy. However, with the Euro set to tumble further on the imminent Greek exit, recent policy measures might be nothing more than spitting into the wind.

After unemployment rose from 7.00% in December to 8.40% in January, the Riksbank has been increasingly nervous about the outlook as it seeks to maintain stability in the region and drive inflation higher. The expansion of the quantitative easing program has the dual strategy of offsetting Krona strength and equally supporting higher inflation. While the Swedish Riksbank was quick to sound optimistic and highlight the positive elements like inflation bottoming, the risks to the outlook are mounting in tandem with a weaker global economy. The remarks in the statement about the willingness of the Central Bank to ease policy further are important and should not be ignored as this opens the door to further rate cuts and expand quantitative easing. The immediate kneejerk reaction in the Krona was weakness as the USDSEK pair soared nearly 1600 pips on the announcement with momentum driving the pair higher. EURSEK also gained, but the reaction was more muted as easing measures undertaken by the ECB are likely to keep the Euro weak over the medium-term.


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