Sweden became the latest country to loosen its monetary policy further amid rising number of COVID-19 cases worldwide by expanding and extending its asset purchases, and reiterated the economy will need extensive support from fiscal and monetary policy over a long period and its key interest rate can be cut.
Sveriges Riksbank, which only just escaped almost five years of negative interest rates in December 2019, left its repo rate at 0.0 percent and expects to keep the rate at this level through the fourth quarter of 2023.
"The increased spread of infection and tighter restrictions will lead to a new downturn in the Swedish economy," the Riksbank said, cutting its forecast for economic growth this year and in 2021, but raising it for 2022.
The central bank, which has been purchasing assets, mainly government bonds, since February 2015 when it also adopted negative interest rates, expanded its asset purchases by another 200 billion Swedish krona to 700 billion and extended the timeframe by 6 months to Dec. 31, 2021.
"By expanding and extending the asset purchase programme, the Riksbank is making it clear that comprehensive monetary policy support will be available as long as it is needed," the bank said, confirming it can also cut its key repo rate "if this is assessed to be an effective measure, particularly if confidence in the inflation target were to be threatened."
In addition to treasury bills and sovereign and municipal green bonds, the bank's executive board decided it would only buy corporate bonds issued by companies that comply with international standards and norms for sustainability.
In September the Riksbank began purchasing corporate bonds for the first time.
The Riksbank's easing of its policy stance comes as Sweden, along with many other countries, are facing a second wave of rising cases of coronavirus and government measures to limit the spread, which then curtails economic activity.
Unlike other countries, Sweden took a more relaxed approach to the first wave of the pandemic but this week the country's statistics agency said life expectancy this year will fall due to the pandemic and the country's top epidemiologist, Anders Tegnell, said there were no signs that immunity in the population was slowing the rate of infection.
On Tuesday the government limited the number of people that can gather in public to 8 from 50, banned the serving of alcohol after 10 p.m. and asked local governments to limit concerts, theatre performances and lectures.
The Riksbank said the already-hard services sector will be strongly affected by the new restrictions and cut its forecast for gross domestic product this year to a contraction of 4.0 percent from the previous forecast of a 3.6 percent decline as domestic demand is now seen shrinking 3.1 percent.
Although the economy will bounce back in 2021, growth will only slowly recover and GDP will grow by 2.6 percent, below the September forecast of 3.7 percent.
"Once the spread of infection declines and the restrictions are withdrawn, the economy will begin to recover again," the bank said, adding developments during the summer showed how fast demand recovers.
By 2022 economic growth will accelerate to 5.0 percent, up from an earlier forecast of 3.7 percent, before slowing to 2.2 percent in 2023.
After a deep 8.6 percent contraction in second quarter GDP from the first quarter, Sweden's economy bounced back in the third quarter, growing 4.3 percent.
But year-on-year, the economy still contracted 3.5 percent in the third quarter, up from a fall of 8.2 percent in the second quarter, after growing 1.3 percent in 2019.
Sweden's inflation rate has decelerated in recent months and fell to 0.3 percent in October from 0.8 percent in August and 0.4 percent in September and the Riksbank forecast headline inflation would only average 0.4 percent this year, down from its earlier forecast of 0.6 percent.
Next year inflation is seen averaging 0.8 percent, then 1.2 percent in 2022 and 1.8 percent in 2023, still below its 2.0 percent target.
