It was precisely one week ago when we described how, for the first time in history, QE had officially failed to achieve its stated objective of pushing yields lower (ignoring that the real purpose is to push stock prices higher). In fact, it the outcome was precisely the opposite because as a result of the ongoing QE by Sweden's Riksbank, and not enough collateral, the "soaking up" of eligible debt made the market so illiquid, buyers were unwilling to touch the bonds until yields rose enough to offset the liquidity risk.
As Danske Bank explained: “Swedish rates continue to trade strong relative to Germany because of a lack of material in the repo market as a result of the Riksbank’s QE program.”
We added that the Riksbank targets about $10 billion in government bond purchases as it tries to revive consumer-price growth after months of deflation. That’s about 14 percent of the market or 3 percent of Sweden’s gross domestic product.
And the punchline: "any efforts to expand asset purchases would deplete Sweden’s already limited sovereign debt supply", SEB AB and Danske Bank have said.
This also came just days ahead of the latest BIS semiannual report in which it blasted central banks for engaging in wanton, endless QE which has pushed stocks to all time highs only at the expense of bond market liquidity.
So what did the Swedish central bank do? Overnight the Riksbank confirmed that it neither learns from its own mistakes, nor reads BIS reports when at 9:30 CET, it shocked central bank watcher all of whom were expecting no rate change from the bank, and announced it is not only engaging in yet another rate cut, taking the key rate even further into record NIRP territory, from -0.25% to -0.35%...
... but adding insult to broken QE injury, it would expand its QE by a further SEK 45 billion starting in September. The reason? Sweden is realizing it is losing the currency war (to a great extent due to its failed QE which is pushing bond yields higher and with it, its currency) and it needs to soak up even more collateral... which can barely be found.
From the Riksbank:
Inflation is rising and economic activity in Sweden is continuing to strengthen. But uncertainty abroad has increased and it is difficult to assess the consequences of the situation in Greece. Since the repo-rate decision in April, the krona has also become stronger than the Riksbank had forecast and the development of the exchange rate remains a risk to the upturn in inflation. In this uncertain environment, monetary policy needs to be even more expansionary to ensure that inflation continues to rise towards the target of 2 per cent. The Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.10 percentage points to -0.35 per cent and to extend the purchases of government bonds by a further SEK 45 billion with effect from September and until the end of the year.
The central bank then had some philosophical observations on the state of the world:
International growth is also rising. In the euro area, economic activity is strengthening, but the events in Greece over the past few days have substantially increased the uncertainty. The consequences of the situation in Greece for the euro area as a whole and for Sweden are difficult to judge.
Since the Riksbank's most recent decision in April, the krona has strengthened more than expected against several currencies. If the exchange rate were to be too strong in relation to the Riksbank's forecast, prices of imported goods would increase more slowly and demand in the Swedish economy would fall. Such a development would risk breaking the upturn in inflation that has now begun.
And since the Riksbank should certainly realize by now this latest move will only exacerbate its problems, it had no choice but to issue its usual latent threat:
The Riksbank still has a high level of preparedness to make monetary policy even more expansionary if necessary, even between the ordinary monetary policy meetings. The repo rate can be cut further and the government bond purchases can be extended. The Riksbank is also prepared to intervene on the foreign exchange market if the upturn in inflation is threatened as the result of, for instance, a very problematic development in the markets. The purchase of other types of securities and the launch of a company lending programme via the banks may also come into question.
So Swedish QE is broken, but the central bank will be delighted to do even more of it to achieve precisely the opposite outcome of what is desired.
Because, as is increasingly obvious, to central banks the New Paranormal motto has become simple: "if it is broken, break it some more."