Riksbank Hawks Zero In on Next Year’s Asset Purchases

Written by
Niclas Rolander
Written by

Niclas Rolander

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(Bloomberg) --

The Riksbank's plan to keep its asset portfolio intact next year is being chipped away at by more hawkish board members who are concerned about accelerating inflation and the impact of bond purchases.

During the pandemic, the Riksbank has chosen asset purchases as its main method for propping up the Swedish economy, and has added covered, corporate and municipal bonds to its holdings of government debt. In minutes from the Swedish central bank's monetary policy meeting last month, three of six rate-setters hinted that they might want to reduce those holdings at a faster pace than currently outlined.

At the November meeting, the Riksbank decided to schedule interest-rate hikes for 2024, in a first sign from the Swedish central bank that it sees an end in sight to its ultra-loose monetary policy.

The increase in the so-called repo-rate path implies that the next battle ground at the bank's executive board will be asset purchases. Any calls for faster tapering may face resistance from Governor Stefan Ingves as well as Per Jansson, widely seen as the most dovish rate-setter.

Deputy governor Martin Floden said the Riksbank should avoid buying private assets as far as possible, and also noted many problems and risks with government bond purchases.

“The benefits of continued purchases, especially of long-term government bonds, appear to be limited,” Floden said. “I therefore believe that it will be appropriate to taper these purchases during the year, and that such a tapering need not result in a significant rise in the interest rates we care about.”

While none of the deputy governors entered any reservation against the plan to keep the asset portfolio unchanged by compensating for bond redemptions, Floden's arguments got some support from fellow deputy governors Anna Breman and Henry Ohlsson.

Ohlsson said he wouldn't have objected if the purchases of covered bonds and corporate bonds had been somewhat lower already in the first three months of 2022, and Breman said it may be appropriate to taper reinvestments further in 2022, but that it is “reasonable to take decisions one quarter at a time.”

“The Board is supportive for the zero rate policy but that further reduction of reinvestments is the next step if anything in 2022,” Danske Bank's analysts said in a note to investors.

Key Comments:

Governor Stefan Ingves:
“The expansionary monetary policy outlined in the draft Monetary Policy Report is needed to ensure that inflation develops in line with our inflation target of two per cent more persistently. And monetary policy consists of several elements: maintaining the size of our bond holdings through 2022, and keeping the repo rate at zero per cent for most of the forecast period.”

Deputy Governor Henry Ohlsson
“I would not have objected if the purchases of covered bonds and corporate bonds had been somewhat lower. Given the uncertainty we are now seeing, I consider that a wellbalanced monetary policy is to limit the concrete purchase plans to the first quarter.”

Deputy Governor Cecilia Skingsley
“I advocate a cautious approach. Given the inflation forecast for the next three years, asset holdings need to remain unchanged in 2022. Once a portfolio wind-down is initiated, it needs to be gradual and predictable.”

Deputy Governor Martin Floden:
“In the draft Monetary Policy Report, we write that the forecast is for the securities holdings to remain roughly unchanged in 2022. This is a forecast that I can only support with hesitation. As I have already indicated, I believe that the experience of the tapered purchases in the early part of 2022 will show that it is appropriate for the continued purchases in 2022 to be somewhat less than what is required to maintain the securities holdings during the year.”

Deputy Governor Martin Floden:

“In the draft Monetary Policy Report, we write that the forecast is for the securities holdings to remain roughly unchanged in 2022. This is a forecast that I can only support with hesitation. As I have already indicated, I believe that the experience of the tapered purchases in the early part of 2022 will show that it is appropriate for the continued purchases in 2022 to be somewhat less than what is required to maintain the securities holdings during the year.”

Deputy Governor Per Jansson
“It can be noted that the decision for purchases in the first quarter of 2022 means that the rate of purchases is almost halved compared to the fourth quarter of this year. In relative terms, purchases of government and municipal bonds in particular are increasing, which I think is a good thing because the need to support the functioning of private markets has diminished and it is now more about ensuring that financial conditions remain expansionary.”

Deputy Governor Per Jansson

“It can be noted that the decision for purchases in the first quarter of 2022 means that the rate of purchases is almost halved compared to the fourth quarter of this year. In relative terms, purchases of government and municipal bonds in particular are increasing, which I think is a good thing because the need to support the functioning of private markets has diminished and it is now more about ensuring that financial conditions remain expansionary.”

Deputy Governor Anna Breman
“Our forecast for securities holdings is that they will remain roughly unchanged through 2022 and gradually decline thereafter. My assessment is that it may be appropriate to taper reinvestments further in 2022, but that it is reasonable to take decisions one quarter at a time.”