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FINANCIAL CRISIS

Riksbank announces loans to Sweden’s financial sector

The Riksbank said on Thursday it would offer 60 billion kronor ($7.71 billion) in loans to financial firms at an auction on November 10th.

Published: 7 November 2008 08:16 CET

The auction is the first of nine scheduled over the coming months of loans to monetary policy counterparties to ease liquidity strains in the markets.

The remaining auctions under the programme are scheduled for November 24th, December 8th, December 19th, January 5th, January 16th, January 26th and February 23rd.

The Riksbank has said that by announcing these dates in advance, it would “create predictability and thus better possibilities for the banks to plan their liquidity supply.”

The loans are provided against collateral and have a maturity of 91 days. A minimum interest rate is set at the current repo rate plus a supplement of 0.25 percentage points.

The Riksbank has previously taken several liquidity-enhancing measures, such as creating a credit facility open only to banks that buy newly issued commercial paper, aiming to improve the supply of loans to the corporate sector.

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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