Riksbank QT impact dampened by bank and hedge fund purchases
The Riksbank's quantitative tightening (QT) has had a limited impact on the Swedish economy, primarily because banks and leveraged investors like hedge funds absorbed the supply of securities. This sustained banks' funding mix and prevented significant increases in risk premia.
Absorption by financial players
The Riksbank's shift from quantitative easing (QE) to quantitative tightening (QT) in 2022, involving maturing and selling securities, was expected to tighten monetary policy.
However, the impact has been limited, with bank deposits remaining stable and risk premia showing no significant increase.
This outcome is attributed to banks and leveraged investors, such as hedge funds, absorbing the supply of securities.
Their increased demand allowed banks to maintain a high share of relatively cheap deposits, keeping their funding structure broadly unchanged.
Furthermore, these leveraged purchases limited the need for investors to rebalance their portfolios, thus dampening the expected contractionary effects of QT.
From QE stimulus to QT's muted effects
Between 2015 and 2022, the Riksbank engaged in QE to stimulate the economy and achieve its inflation target.
In 2022, it transitioned to QT by allowing bonds to mature and later selling them.
This was anticipated to lead to higher risk premia, subdued lending, and lower bank deposits.
However, these effects have been limited.
For instance, the spread against swaps on covered bonds has remained stable or even fallen, and bank deposits have not declined as expected.
The analysis suggests that the predictability of the Riksbank's measures and recent policy rate cuts may have also contributed to the muted impact.
A surprising resilience
The findings challenge conventional assumptions about the direct transmission channels of quantitative tightening.
While the Riksbank's balance sheet contracted, the banking sector's overall funding structure remained largely unaffected due to internal reallocations and new lending.
This suggests that the effectiveness of QT can be significantly influenced by the behavior and funding dynamics of key financial intermediaries.
For future policy, this implies a need to consider the broader financial ecosystem's capacity to absorb central bank actions, potentially requiring more targeted measures to achieve desired monetary policy outcomes.