Call it a “sleight of hand” – Barclays is.
On Sunday, we previewed this week’s Riksbank decision, noting that all eyes would be on what the bank decided with regard to the continuation of QE.
Monetary policy in Sweden is effectively beholden to Mario Draghi. As Stefan Ingves creatively put it earlier this year, “when you are next to an elephant, you have to be careful.” Put differently, if the market perceives that Riksbank policy is taking a decisively different path than ECB policy, that perception will be reflected in EURSEK which of course has implications for the bank’s inflation target.
So today’s decision was important in light of the ECB’s October announcement that although APP will be tapered further in January, purchases will extend through September and in all likelihood to the end of next year.
The Riksbank got creative. In short, they’re going to end QE officially, but they’re going to bring forward reinvestments effectively meaning that they will not only retain their presence in the market, their balance sheet will actually expand temporarily.
“Likely fearing that the announcement of an end to QE would result in material SEK strength and wanting to retain presence on the market, however, the Riksbank announced that the reinvestments of redemptions and coupon payments of its bond portfolio will begin as early as January 2018 and continue until the middle of 2019,” Barclays writes on Wednesday morning, adding that “as a result, the Riksbank’s holdings of nominal and real government bonds will rise temporary in 2018 and the beginning of 2019.”
So this is actually a “dovish” end to QE. That’s some creativity there and again, the reason it’s necessary is because the bank is walking a tightrope – if they do anything at all that’s perceived as overly hawkish while the ECB is still actively easing, they risk krona appreciation which would imperil their inflation target just when they’re trying to wind down stimulus. It’s the policymaker paradox.
Underscoring that is SEB head of global macro and FX research Carl Hammer:
Riksbank reinvestment of 2019 bonds somewhat faster vs our expectations. CPIF forecasts at 2% target (average) 2017-19, revision higher likely due to weaker SEK -> weak exchange rate will be important near-term. Rate path unchanged and a rate hike is more likely now Q3-18.
— Carl Hammer (@CarlHammerFX) December 20, 2017
See what I mean? The inflation target depends on a weaker krona, but once you hit the target and try to exit stimulus, you risk catalyzing FX appreciation as long as your larger neighbor (the ECB) is still easing.
Here’s Credit Agricole:
The central bank doesn’t want the currency to appreciate too quickly as such a development could derail last few quarters progress toward price stability. Nevertheless, currency is trading below the Riksbank’s forecast and hence such a tone is not having much effect. The market takes housing market weakness as predominant currency driver still and that suggests a slightly more hawkish Riksbank outcome is not triggering sustainable currency upside.
EURSEK was whipsawed around the announcement:
It will be interesting to see how this plays out. Especially against a backdrop where the housing bubble looks to be in the early stages of popping.