In Risky Move, Riksbank Holds Rates But Warns Will Cut If ECB Boosts QE

In July, Sweden’s Riksbank did a funny thing - they doubled down on QE even after it became clear that QE had failed. And we don’t just mean "failed" in the somewhat abstract sense that all global QE has failed when it comes to bringing about a robust recovery and shaking the global economy out of the demand doldrums. We mean it actually failed. As in, the Riksbank sucked up so much of the available high quality collateral that 10Y yields and the krona started moving in the wrong direction in a very non-accommodative self-feeding loop. 

Be that as it may, not everyone was convinced that demonstrable evidence of failure would be enough to deter further easing at Thursday’s meeting, but lo and behold, the Riksbank stood pat. 


Of course in a world where everyone has been forced to adopt an overwhelming easing bias, being complacent can be a death sentence, so we can only assume that the Riksbank might be simply hoping against hope that everyone else also remains on hold so that it’s not forced to triple down on the first official QE failure and indeed, the consensus seems to be that the bank’s perceived complacency will be temporary - very temporary. Here’s a look at some analyst commentary courtesy of Bloomberg:  

Nordea sticks to forecast of a Riksbank rate cut in Oct. for now, but says the odds of further easing have diminished. SEK developments remain crucial, Nordea says in note. Says Riksbank on the optimistic side on inflation forecast longer out; together with the easing bias in the rate path this suggests that Riksbank is not done yet.


Riksbank Will Need to Do More This Year: Danske Bank. Bank could cut rates further in December, and “it’s also quite likely they’ll need to do more in terms of QE,” Michael Grahn, analyst at Danske Bank, says by phone.


SEB Sees High Likelihood of Riksbank Rate Cut in Oct. Risk for krona strength if Riksbank doesn’t confirm determination to do more increases probability for more action, as market expectations for another rate cut continue to be high, SEB says in note.

You get the idea. 

And of course, after the policy announcement, the krona rocketed to a 5-week high against the euro.

Swedish krona rises as much as 0.72% vs EUR to 9.4002, highest since July 24 after Riksbank holds key rate unchanged at -0.35%.

Note that this looks to have been a particularly risky thing to do ahead of today’s ECB decision, especially in light of expectations for Draghi to announce an expansion of PSPP. And the Riksbank is well aware of the potential pitfalls. From Bloomberg again: 

Riksbank Governor Stefan Ingves says any rapid strengthening of krona would pose risk to inflation rise. Riksbank won’t be passive if ECB makes big changes in its policy, Riksbank Governor Stefan Ingves says at press conference.

And at the punchline to the whole charade is that, as predicted by Morgan Stanley, and as predicted here when we noted in July that Sweden is undoubtedly a proponent of the post-crisis central banker mantra of "if it’s broken, break it some more," the Riksbank effectively acknowledged that QE had broken the market but instead of taking that as a warning, it will simply move on to breaking other markets:


And finally, as tipped above, the currency wars will continue unabated:

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Because no Riksbank post is complete without it...