(MENAFN- Gulf Times) An unprecedented move in Swedish monetary policy history won't be enough to stop the largest Nordic economy from becoming entrenched in a deflationary pit.
That's according to economists at HSBC Bank, JPMorgan Chase & Co, Citigroup and Royal Bank of Scotland Group, among others. They remain skeptical even after the Riksbank last week cut its repo rate below zero and promised to buy 10bn kronor ($1.2bn) in government bonds.
"It's fine what they've been doing, but it's still less than what we expected," said Tina Mortensen, an economist at Citigroup. The Riksbank will cut its main rate to minus 0.25% and continue to buy government bonds, she predicts. "We still see inflation on the low side of the Riksbank forecast."
Policy makers in Stockholm are fighting to prevent deflation from taking hold, reversing policies designed to limit household debt growth that Nobel laureate Paul Krugman called "sadomonetarist." Sweden has now joined Switzerland and Denmark in resorting to negative benchmark rates in what some analysts have dubbed a global currency war.
Deutsche Bank AG said the Riksbank's bond-purchase plan was "miniscule," while Capital Economics estimated it equal to 0.3% of the Swedish economy. The European Central Bank's plan will reach 10% of gross domestic product.
Riksbank Governor Stefan Ingves said last week he can't rule "anything" out amid increased risks, after delivering the historic package of stimulus measures. Policy makers have no lower limit on rates and can buy as many bonds "appropriate," he said.
"We will eventually boost inflation sooner or later," Ingves said in an interview. "In one way or other, you can always create enough money so that prices start to rise."
According to ING Bank NV, the small size of the bond purchase plan will add pressure on the krona to strengthen, lowering inflation further.
"The Riksbank will, we feel, have to respond more forcefully in the months ahead if it's not to see exchange rate appreciation depress inflation rates," said Rob Carnell, chief international economist at ING Groep NV. For example, the Riksbank would need to do 13bn kronor a month to match the balance sheet expansion of the ECB, he said.
The Riksbank's February 12 decision caught traders by surprise. The krona slumped as much as 2.1% and the yield on Sweden's benchmark five-year note fell 18 basis points to below zero. Two-year yields slid deeper below zero, reaching minus 0.30%.
The Riksbank's quantitative easing plan represents about 2% of all outstanding Swedish government bonds.
While analysts abroad said more will be needed, economists at Swedish banks questioned the unprecedented easing as it risks inflating record household debt levels even further.
"There's no reason to conduct such an aggressive monetary policy," said Torbjoern Isaksson, chief analyst at Nordea Bank in Stockholm. "This risks creating more problems rather than solving problems."
Ingves said it's now more important than ever for the government and regulator to ensure household debt growth doesn't spiral out of control. Swedish households owe their creditors about 170% of disposable incomes after house prices surged over the past decade.
The battle to end deflation comes against a backdrop of an expanding economy. The Riksbank predicts the economy will grow 2.7% this year and 3.3% next year.
Given the limited size of its quantitative easing programme, any effectiveness is "greatly reduced," Janet Henry and Daragh Maher, analysts at HSBC, said in a note."But the Riksbank's signaling intentions were clear," they said. "It stands ready to do more if required."
Royal Bank of Scotland said policy makers in Stockholm are contending with a deflationary picture that's "sweeping the world."
"What was special about this was the Riksbank said that they're prepared to do whatever it takes," said Par Magnusson, chief economist at RBS in Stockholm. "Nothing is off-limits."
The "communication is bigger than the level of the negative rate and that they announced QE," he said.
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