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Sweden Gets Heavy Dose of QE to Slow Economy’s Freefall

Niclas Rolander, Rafaela Lindeberg and Love Liman
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Sweden Gets Heavy Dose of QE to Slow Economy’s Freefall

(Bloomberg) -- Sweden’s central bank ramped up its stimulus and pledged to buy corporate bonds in a bid to brake the Nordic economy’s freefall and an alarming jump in joblessness.

The Riksbank, acting sooner than many investors expected to aid growth, added another 200 billion kronor ($21 billion) to its quantitative easing and extended the program until June next year. It said 10 billion kronor will be devoted to corporate bonds, and it also took measures to ease the flow of credit to companies through the coronavirus crisis.

“It’s not over yet, so to be on the safe side we decided to do more,” Riksbank Governor Stefan Ingves told Bloomberg Television. “We can do more QE if we have to. If things would turn out better, we most likely would stop buying, and after that we would most likely hold on to the portfolios we have accumulated over time.”

With the economy anticipated by officials to shrink 4.5% this year, the monetary authority is acting with arguably all the weapons at its disposal apart from negative interest rates. The Riksbank has set itself apart from peers by becoming the world’s only central bank to have both experimented with and escaped from subzero monetary policy.

Sweden has also stood out for applying possibly Europe’s loosest lockdown to keep the coronavirus at bay, an experiment that has softened the blow to growth. The country has suffered among the world’s highest per-capita death rates from the disease.

“In Sweden and elsewhere, we expect a short-term bounce will be followed by a period where social distancing keeps a lid on economic activity,” said Johanna Jeansson, an economist at Bloomberg Economics. “Boosting QE is the right thing to do in order to help smooth the transition to a new normal for businesses and households.”

The krona weakened slightly against the euro after the Riksbank’s announcement before later strengthening. It traded at 10.4817 kronor a euro as of 12:49 p.m. in Stockholm.

While the Riksbank didn’t redeploy negative interest rates, officials are “ready to use our entire tool box” and can reactivate the policy if they need to, Ingves said.

“It’s still on the table,” he said in the interview. “But circumstances are different today compared to when we started with the negative rate back in 2015 -- because one needs to be mindful of the fact that we are doing massive QE.”

That decision not to return to a negative monetary policy for now was applauded by SEB Chief Economist Robert Bergqvist. Officials predict that the benchmark repo rate will stay at zero all the way through mid-2023.

In SEB’s poll of fixed-income investors, 90% had expected the Riksbank to announce additional bond purchases this year, though most of them believed it would stay its hand at the July meeting and act later in 2020. The program will now total 500 billion kronor.

The decision to expand into corporate bond purchases is a new departure for the central bank, which is still working out how to conduct such a policy. It announced on Wednesday that it will keep engaging BlackRock Financial Market Advisory for counsel on that market. Ingves said purchases will begin in September.

“If we buy about 10 billion kronor and make diversified purchases -- because it is important not to have too large holdings in single companies -- we can easily, if needed, scale that up,” Ingves told reporters. “You have to start somewhere.”

What Bloomberg’s Economists Say...

“The Riksbank moved faster than we expected today by unveiling an expansion of its asset purchase program.”

-Jeanna Jeansson. Read her SWEDEN REACT

(Updates with Ingves in third paragraph)

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