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Sweden’s central bank to increase government bond purchase program

Sweden’s central bank, Riksbank, increased its government bond purchase program by almost 50% to total 200 billion Swedish kronor ($24.2 billion) by the end of June 2016, in a move that has surprised the markets.

The bank said in a statement Wednesday that its monetary policy needs to be more “expansionary,” to underpin positive developments in the economy, and to safeguard the “robustness of the upturn in inflation.”

Riksbank said continued low international interest rates needed to be taken into consideration when looking at Swedish monetary policy. “Otherwise, the kronor risks strengthening earlier and more rapidly than forecast, which would lead to a slower increase in the prices of imported goods and services and lower demand for Swedish exports. This would make it more difficult for the Riksbank to push up inflation and stabilize it around the target” of 2%, the statement said.

The bank also indicated it’s prepared to do more to ensure inflation rises and stabilizes around that figure. It can make monetary policy even more expansionary, can cut the repo rate further than its current -0.35%, and the Riksbank can also purchase more securities, the statement said. The bank is also prepared to intervene on the foreign-exchange market, and to launch a program of lending to companies via the banks, the statement added.

The expansion of Sweden’s quantitative easing program is “quite surprising when set against a backdrop of improving economic fundamentals, but is most likely a result of concern of imminent currency appreciation as a function of last week’s extremely dovish (European Central Bank) meeting with debasement of the euro a central pillar to ECB policy,” said Richard Benson, managing director, co-head portfolio investments, at Millennium Global Investments, in an e-mail. He said the euro is the Swedish kronor’s natural trading partner. “We retain a constructive view on the Swedish kronor due to its improving economic fundamentals and the more aggressive monetary policy being pre-announced by its main trading partner,” the ECB. Mr. Benson added the firm would become “less comfortable if appreciation of the kronor were anything other than slow and gradual.”