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Riksbank QE move rattles krona and drags on yields

Sweden’s Riksbank once again swam against the central banking current by extending its government bond-buying programme further, despite continued signs of strength in the Scandinavian country’s economy.

The move to extend its quantitative easing programme into the second half of the year took traders and economists by surprise after recent robust figures for growth and manufacturing in Sweden.

The krona fell 1 per cent against the euro, on track for its largest one-day slide since October. Swedish 10-year bond yields dropped 4 basis points to 0.59 per cent.

The Riksbank was divided over the move with three deputy governors voting against the extension, which passed only after the governor, Stefan Ingves, used his deciding vote.

Sweden has been at the heart of several central banking debates since the global financial crisis despite its relatively small size.

Its decision to raise interest rates in 2010-11 — only to have to cut them later as inflation failed to take hold — was cited by many at the US Federal Reserve as grounds for caution over when to start lifting rock-bottom rates.

The Riksbank has now gone to the other extreme with its main repo rate at minus 0.5 per cent. It agreed on Thursday to keep those rates on hold, as economists expected.

But many were taken off guard by the Riksbank saying it would buy SKr15bn of bonds in the second half of this year with the consensus expecting the programme to expire in June.

It also suggested interest rates would remain negative into 2019.

There are increasing worries that the Riksbank is storing up problems for later by keeping rates so low when the economy is performing strongly.

Figures this week showed manufacturing confidence hitting its highest level in 20 years while unemployment is at its lowest level since the financial crisis.

“To us, the Riksbank’s continued dovishness is hard to explain . . . Notably deputy governors Martin Floden, Henry Ohlsson and Cecilia Skingsley voted against the decision to extend asset purchases because they did not believe that the economy warranted more expansionary monetary policy at this point,” said James Pomeroy, economist at HSBC.

Andreas Wallstrom, economist at Nordea, said: “This was a more dovish message than we, and the market, had expected. While the real economy has performed somewhat better than the Riksbank had in mind in February, the inflation outlook remains subdued.”

The Riksbank remains concerned that inflation persists below its target of 2 per cent and the central bank modestly cut its target for core inflation next year as well as wage growth.

The central bank has been confounded by inflation staying stubbornly low even as the economy has recorded GDP growth rates among the highest in Europe. Sweden’s economy grew 4.1 per cent in 2015 and 3.3 per cent last year, according to Eurostat.