Sweden's central bank the Riksbank has cut interest rates to -0.25 and expanded its quantitative easing programme as it looks to stave off the effects of its stregthening currency.
The Riksbank has dropped interest rates by 0.15 percentage points, and said it will buy government bonds, with maturities of up to 25 years, for SEK 30bn (£2.3bn). The bond buying programme will begin on March 26 and is expected to complete at the beginning of May, an extension of purchases made last month and earlier this month.
The Riksbank said it expected to keep interest rates at -0.25 per cent until “at least the end of the second half of 2016”. After that it is expected to rise “gradually and at a slower pace than was forecast” in its report published in February.
Sweden had already entered negative terrority before today's decision – its interest rate was -0.1 per cent – and it is still well above Denmark and Switzerland, which have interest rates of -0.75 per cent.
The Riksbank – which has come under criticism from US economist Paul Krugman for creating a Japan-style deflationary environment – said its monetary policy so far had been having “a positive effect on the Swedish economy”.
“GDP growth is relatively good, the labour market is strengthening gradually and there are signs that inflation has bottomed out, although it is still low,” it said.
But the measures were necessary because of the “considerable uncertainty over international economic developments and the effects of the oil price,” which has led to the krona strengthening “substantially”.
“There are signs that inflation has bottomed out and is beginning to rise, but the recent appreciation of the krona risks breaking this trend,” the Riksbank said today.
“These measures and the readiness to do more at short notice underline that the Riksbank is safeguarding the role of the inflation target as a nominal anchor for price setting and wage formation.”
The krona dropped by 1.5 per cent against the dollar and 1.1 per cent against the dollar on the back of the news.
But it could go further yet, pledging to make monetary policy “even more expansionary, even between the ordinary monetary policy meetings” if necessary.
“The repo rate could possibly be cut somewhat further and the Riksbank could buy even more government bonds,” the central bank said. It is also prepared to launch a programme of loans to companies via banks if needed.
The interest rate decision will take effect from March 25. We await Krugman's response with interest.