Riksbank Expands QE; Market Questions Central Banks’ Influence

On Thursday the Swedish Riksbank (central bank) announced an expansion of its QE program, adding 45 billion Kronar to the existing 200 billion Kronar plan. The repurchase rate was left unchanged at -0.5%. Inflation has been running well below the 2% target, and the currency has been under upward pressure. Therefore, the QE expansion was intended to increase inflation and weaken the currency. However, after a brief move lower, the currency reversed and moved higher against the Euro. QE programs (and other monetary stimulus measures like ZIRP and NIRP) are generally intended to lower interest rates so as to spur economic activity, and subsequently inflation. In a counterintuitive response to the Riksbank move, rates rose on Swedish bonds. This is not the first time we have seen such counterintuitive market reactions to central bank policy changes. We wrote about the market reaction to the ECB stimulus announcement in March, and have been watching the run-up in the value of the Yen since the BoJ cut rates into negative territory in January of this year. There is a growing chorus in the investor community questioning the efficacy of ever more radical central bank policies, and this most recent rejection of the Riksbank move will only increase the volume of these voices. While these market moves are responses to many complex inputs within a global economic landscape, and represent a discounting of currently available information, they also serve as a reminder that we remain in very unique circumstances nearly a decade after the financial crisis. There has been no direct effect on our rates markets from the Riksbank move, and shortly afterward the ECB announced no change in its monetary policy. Thus, we believe that for now the low growth and low inflation environment will persist, and that the low (or negative) rates on global developed economy government bonds will continue to support prices of Treasury notes.

Sources: RBS and Bloomberg