Sweden’s central bank implemented a larger than expected rate cut and signaled low rates are here to stay in an attempt to counter a low inflationary environment and stimulate growth, bolstering the Sweden country-specific exchange traded fund but pressuring the krona currency to a four-year low.
The iShares MSCI Sweden ETF (NYSEArca: EWD) was up 0.8% Tuesday while the CurrencyShares Swedish Krona ETF (NYSEArca: FXS) was 0.9% lower. Year-to-date, EWD has declined 8.2% and FXS is down 11.7%.
The Riksbank lowered its main policy rate to zero from 0.25%, compared to expectations of a 15 basis point cut to 0.1%, reports Neil Dennis for the Financial Times. Additionally, the central bank hinted that it will push off on any future interest rate hikes, with many analysts predicting the next hike would not be until 2016.
Consequently, the Swedish krona depreciated as much as 1.2% against the U.S. dollar, touching a four-year low.
“Inflation is too low,” Riksbank said, adding that monetary policy will be more accommodative and that unconventional measures could be taken if necessary.
Some observers believe the central bank may even start implementing a currency floor, similar to the Swiss-style franc-to-euro floor.
The central bank’s move has largely been a response to the stubbornly low inflation, but economic growth in Sweden remains much stronger than its Eurozone neighbors.
The Swedish economy expanded at an annual 2% over the second quarter. However, consumer prices have only increased one month in 2014 and September’s consumer price index was negative 0.4%, the 15th negative monthly reading since the end of 2012. In comparison, the central bank has a 2% target.
While the move to a zero rate seems aggressive, some argue it may be only the beginning. The country may implement greater stimulative measures, which could help move the economy and further depreciate the currency.
“There is a risk today’s measures still fall short of policy objectives, which raises the prospect of unconventional measures such as a negative repo rate or quantitative easing as structural reform does take time,” UBS currency strategist Geoff Yu said in a Wall Street Journal article.
iShares MSCI Sweden ETF
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