Thedéen: Riksbank sets high bar for asset purchases

Governor Erik Thedéen focused on asset purchases, or quantitative easing (QE), as a monetary policy instrument, noting the Riksbank recently finalized the sale of previously purchased securities, returning its balance sheet to a more normal size.

He distinguished between crisis-driven asset purchases and 'normal' unconventional monetary policy, focusing on the latter.

Theoretically, QE operates through portfolio balance and signalling channels.

The portfolio balance channel suggests central bank bond purchases push down long-term interest rates and risk premiums, encouraging investment and consumption.

The signalling channel implies large-scale purchases signal prolonged expansionary policy, influencing future interest rate expectations.

Empirical research indicates QE has clear effects on financial variables like bond and equity prices, but its impact on GDP and inflation remains more uncertain and contingent, especially when used outside acute crisis situations.

Thedéen addressed the academic debate on the future neutral interest rate, which defines the 'normal interest rate environment'.

While some research suggests a sustained post-pandemic increase, others argue long-term downward pressures persist, making a lasting rise uncertain.

For Sweden, Martin Flodén's analysis indicated that Riksbank's government bond purchases (2015-2019) lowered yields by at least 30 basis points.

However, Flodén found no clear reduction in financing costs for households and companies, arguing the portfolio balance channel was ineffective as covered bond yields did not fall proportionally.

Swedish households' variable-rate borrowing further limited the impact of long-term bond yield changes.

Thedéen stressed understanding QE's efficacy given this lack of consensus for future policy considerations.