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FINANCIAL CRISIS

Riksbank throws banks another lifeline

The Riksbank announced on Monday that it was increasing the credit it is making available to Sweden’s banks from 60 billion kronor ($8.3 billion) to 100 billion kronor.

Published: 6 October 2008 08:30 CEST

Riksbank throws banks another lifeline

An additional 100 billion kronor will be made available for auction on Wednesday, October 8th.

The additional injection brings the total liquidity supplied by the Riksbank to 354 billion kronor since the start of the current global financial turbulence.

“The Riksbank is now taking swift measures to facilitate the credit supply for the Swedish banks,” said Riksbank Governor Stephan Ingves.

“Together with the actions taken by the Swedish National Debt Office (Riksgälden), liquidity of more than 500 billion kronor is being supplied in different ways. The Riksbank is prepared to provide the liquidity necessary to safeguard financial stability and ensure the smooth functioning of the financial markets in Sweden.”

Ingves again emphasized that the current upheaval in global financial markets was “clearly affecting” Sweden and warned of the continued risk of “negative effects” on the credit supply to banks, companies, and individuals.

Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview.

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken.

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.”

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.”

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said.

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.

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