Most likely, the ECB works in concert with all Eurozone sovereign central banks and perhaps the reason the ECB moves with deliberate measured increments. Riksbank made its concerns clear in the December policy statement:  “... To safeguard the strength of the upturn in inflation, the Executive Board of the Riksbank has decided to hold the repo rate at –0.35 per cent. Purchases of government bonds will continue... ... that the repo rate will not be raised until CPIF inflation has stabilised around 2 per cent during the first half of 2017...” Riksbank’s Executive Board went on to note that it was “still highly prepared” to act. The point of the matter is that Riksbank was encouraged by positive domestic results and was also acting with prudence.

At the next meeting3, 21 January, the ECB Governing Council maintained it policy in every regard from the December meeting. The statement tone was initially optimistic but became more cautious as it progressed “...Taking stock of the evidence available at the beginning of 2016, it is clear that the monetary policy measures that we have adopted since mid-2014 are working. As a result, developments in the real economy, credit provision and financing conditions have improved and have strengthened the euro area’s resilience to recent global economic shocks...” However, it went on to say that “...downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks. In this environment, euro area inflation dynamics also continue to be weaker than expected. It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March...

Riksbank’s meeting was well before and the combination of the ECB statement, intra-bank communications and simply the geo-economic situation in general was enough for Riksbank’s Executive board to move ahead of the ECB. The 11 February statement4 was far less encouraging than the previous December statement: “...The economy continues to strengthen but inflation is expected to be lower during 2016 than previously forecast. The period of low inflation will therefore be longer. This increases the risk of weakening confidence in the inflation target and of inflation not rising towards the target as expected...”  The bank reduced the key repurchase agreement rate a further 15 basis points to -0.50%. Riksbank also adopted the practice of reinvesting returns from assets on the balance sheet, just as the ECB did at the December meeting. Lastly, Riksbank was “ready to do more” by reducing the repurchase rate further, currency intervention and “...by buying nominal and real government bonds...”

Time would prove Riksbank justified. At the 10 March meeting the ECB took further steps: “...we decided to lower the interest rate on the main refinancing operations of the Eurosystem by 5 basis points to 0.00% and the rate on the marginal lending facility by 5 basis points to 0.25%. The rate on the deposit facility was lowered by 10 basis points to -0.40%...” as well as increasing the asset purchase program by €20 billion to €80 billion, to include non-government investment grade bonds. This was a significant change to the recipe as compared with previous measures.

Clearly, for the ECB to take more comprehensive action, as well as those non-Eurozone EU members either getting out in front or moving after-the-fact, may be an indication that the Eurozone may be very concerned with exogenous events impacting the EU.

Further indications that the ECB may have tipped its hand may be observed in the chart. The Krona strengthened sharply after the Riksbank meeting from 9.4991 Krona per Euro, to 9.2318 per before recovering slightly; about 2.8% in 5 weeks.  Riksbank’s next meeting is 21 April. Considering that Riksbank has clearly stated intra-meeting currency intervention as a policy tool and the Krona is still strengthening, a major Riksbank concern, it’s difficult to imagine Riksbank not taking further policy actions then. However, with Swedish bond market liquidity shrinking, would this necessarily mean the Krona would reverse and weaken?

The next scheduled ECB policy meeting happens to fall on the same day, in Frankfurt. If the previous December policy actions have proved insufficient, the ECB might add a little additional spice to its QE recipe. It’s clearly data dependent. However, it’s difficult to expect the Krona to weaken against the Euro in either event.

Mike Scrive
Technical Analyst
Accendo Markets

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1 ECB Press Release 12-3-2015
2 Riksbank Press Release 12-15-2015
3 ECB Press Release 21-1-2016
4 Riksbank Press Release 11-2-1016