June 29, 2020 / 2:08 PM / 5 days ago

Riksbank seen holding benchmark rate, QE extension possible soon

STOCKHOLM (Reuters) - Sweden’s central bank will keep its benchmark rate unchanged, but could expand its balance sheet again at this week’s meeting amid uncertainty about how quickly the economy will recover from the coronavirus pandemic, a poll of analysts showed on Monday.

Having opted against a total lockdown, Sweden may be less badly hit economically than some other countries, though the contraction in GDP this year is still likely to be the biggest since World War Two.

The majority of analysts in the poll expect the Riksbank to continue its focus on balance-sheet measures and leave the benchmark rate unchanged for the foreseeable future.

However, worries that the currency could slow down recovery and further weaken inflation mean it could increase its bond-purchase programme now or later this year.

“In order to avoid the SEK strengthening too much and too fast, we expect the Riksbank to copy the ECB’s latest rate decision and present an extension of the QE programme from the end of this year to mid-2021,” banking group SEB said.

On June 4, the ECB extended its emergency bond purchase scheme to mid-2021 and increased it by 600 billion euros ($675 billion) to 1.35 trillion euros.

SEB said the Riksbank would add another 200 billion Swedish crowns ($21.54 billion), taking its quantitative easing measures to a total of 500 billion.

Three respondents saw an expansion of the QE programme coming later in the year. Other analysts did not answer this question.

The world’s oldest central bank has so far focused on keeping the wheels of the financial sector turning as it fights the downturn caused by the coronavirus pandemic, offering loans in dollars and crowns as well as other measures.

But it has not ruled out a rate cut, saying it would be more effective in boosting demand when the economy opens up again.

Three analysts said the Riksbank could cut rates in the fourth quarter and a further analyst said the Riksbank would go below zero again at the start of 2021.

However, the Riksbank is wary about returning to negative rates, with rate-setters pointing to downsides.

The Riksbank announces its policy decision at 0730 GMT on July 1.

Reporting by Simon Johnson; Editing by Kevin Liffey

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