The Swedish krona rallied against many of its major currency counterparts on Tuesday after the central bank left interest rates unchanged and maintained stimulus measures to reverse its worst economic slump since the Second World War. But policymakers assured markets that they would act if the financial crisis intensifies and additional monetary easing is needed to mitigate a severe downturn.
Before this weekâs policy meetings by the Federal Reserve and the European Central Bank (ECB), investors kept an eye on the Riksbank. If traders were anticipating a rate cut, then they would have been disappointed. Officials kept rates at 0% for the second consecutive month. The Riksbank lifted rates from subzero territory at its December meeting for the first time in five years.
The central bank noted that cutting rates would not solve its economic problems. Instead, Governor Stefan Ingves stated that it is better to concentrate its efforts on credit markets.
We really want to ensure that the financial sector keeps working, thatâs why we are massively using our balance sheet. Without doing so we run the risk of having all sorts of problems. Our choice now is to not use the policy rate, but to create more money by lending or buying assets.
In our judgment, it has been much, much more important to use our balance sheet.
And that is what the Riksbank is planning. Ingves revealed that high-grade corporate bonds might be added to its historic $30 billion quantitative easing program to prevent a credit crunch. In recent weeks, the central bank has extended approximately $50 billion in cheap bank loans, doubled its current bond-buying program, and approved access to US dollar liquidity for lenders.
Estimates suggest that Sweden is poised to boost its balance sheet to about $250 billion, representing about 50% of gross domestic product (GDP).
On Tuesday, Statistics Sweden reported that retail sales tumbled 1.7% in March, down from the 0.2% gain in February. The market had forecast a contraction of 2.8%. This brought the annualized rate to 0.6%, down from 3.7%.
In the coming days, the 12-month household lending growth rate is projected to come in at 4.4%, and the manufacturing purchasing managersâ index (PMI) for April is expected to slip below the 50 mark.
The USD/SEK currency pair fell 1.42% to 9.8764, from an opening of 10.0145, at 13:14 GMT on Tuesday. The EUR/SEK declined 1.02% to 10.7304, from an opening of 10.8422.
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