Ever since the BoJ took the plunge into NIRP late last month analysts and commentators alike have begun to express a high degree of skepticism about the wisdom of adopting negative interest rates.
Once seen as a kind of peculiar policy experiment confined to Switzerland, Denmark, and Sweden, NIRP has escaped the lab so to speak and now that Kuroda is negative and Draghi is contemplating another depo rate cut in March, people are starting to realize that the entire developed world might be about to go Keynesian crazy. Even the US.
Indeed it was just yesterday that we brought you the latest from JP Morgan, where analysts made the following rather shocking predictions about how low rates could go under tiered implementation system:
As we’ve explained on a number of occasions, this is becoming a never-ending race to the bottom. It’s an all-out currency war and when one central bank eases, so too must the others or risk seeing their inflation targets jeopardized. That’s especially true for Sweden where governor Stefan Ingves is concerned about what the Riksbank sees as excessive krona strength and still sluggish inflation.
On Thursday, in an effort to get out ahead of the ECB, the Riksbank cut again, taking the repo rates by 15bps to -0.50% in a move that Nordea calls “a bit more than expected.” QE will continue as planned and the Riksbank “will reinvest maturities and coupons from the government bond portfolio until further notice.”
“Uncertainty regarding global developments is still high, with low inflation and several central banks pursuing more expansionary monetary policy,” the bank continued. “Swedish monetary policy must relate to this. Otherwise the krona exchange rate is at risk of strengthening at a faster rate than in the forecast, which would make it harder to push up inflation and stabilize it around 2 percent.” Here was the move in the krona:
The bank also reiterated that it's prepared to intervene directly in the FX market to curb krona strength if necessary and contended that there's still more room to cut rates further. "So far, at least in this economy, these things have worked actually pretty much the way one would expect," Ingves said, addressing the effect deeply negative rates have on Swedish banks. “When it comes to Swedish banks, their profit level is very, very good so at this level that’s not an issue."
Analysts are divided on how things play out from here. Here's some commentary (via Bloomberg):
From Standard Bank:
- After Riksbank cut its key rate to -0.5%, European central banks’ dive into deeper rates will continue, Steven Barrow, analyst at Standard Bank, says in e-mailed comments.
- Riksbankoutcome is a bit more dovish than market expected and so weighs on SEK and yields
- This is of significance because European banks are acting as a guide to how negative rates can go
- Should the likes ofRiksbankand SNB lower rates further, that could offer more clues as to where the real lower bound is on rates
From Nordea:
- Interpret the comment on the operational framework as a potential move toward a tiered-rates system in Sweden, as seen in Denmark, Switzerland and Japan, Martin Enlund, analyst at Nordea writes in e-mailed comment.
- Says comment is very dovish and could wreak havoc with Swedish money-market rates
- ECB likely to decide how much the Riksbank will do in the rates space, and some market participants are now looking for ECB to cut 20bps in March and another 20bps in June; would almost surely pushRiksbankinto a tiered-rates system later this year
- Overall dovish surprise; Nordea would be a bit hesitant in buying SEK until dust settles, which could take a day; the normal pattern is that EUR/SEK drops 1% in the 2 wks after a softRiksbankdecision
From Danske:
- Swedish central bank will probably have to ease monetary policy further as inflation forecasts are still too optimistic, says Michael Grahn, an analyst at Danske Bank.
- PredictsRiksbankwill expand government bond purchases beyond June; doesn’t exclude more repo rate cuts
From Swedbank:
- Riksbank’s decision to cut its repo rate to -0.50% was expected but there’s now increased disagreement among board members, Anna Breman, chief economist at Swedbank AB, says by phone.
- “Interesting” that two board members entered reservations against the rate cut and Floden against extension of FX intervention delegation mandate
- Repo rate path indicates possible further rate cuts
- Says that Riksbank further move into negative will lead to “big discussion”on mon. policy and the inflation target, as negative rates will remain below zero for a long period
From SEB:
- SEB sees 40% likelihood that Riksbank will ease monetary policy further, mainly due to downside risks in world economy, says Olle Holmgren, an SEB analyst.
- Riksbankinflation forecasts are still too optimistic
- Further rate cut, expanded QE most likely stimulus tools
- Still, reservations against today’s cut by two of six board members may suggest repo rate is starting to near bottom
- FX interventions remain an option if SEK strengthens to 9-9.10 against EUR; uncertainties about scope ofRiksbank’s intervention mandate decreases likelihood of intervention
Your move Draghi.
