Riksbank bond purchases also lower short-term interest rates
News, Staff memo A stated objective of central bank bond purchases is to lower long-term interest rates. The government bond purchases of the Swedish central bank, the Riksbank, have, however, also lowered interest rates for short-term holding periods. These results are published by Henrik Erikson, senior advisor to the Monetary Policy Department in the Staff memo ”Central bank bond purchases and premiums – the Swedish experience”.
Erikson has studied data from 2015-2017 on short-term sell/buy-back transactions, a type of repo transactions. The interest rate on these transactions reflects the short-term holding period returns facing investors in government bonds. In the period 2015-2017, these interest rates fell relative to the policy rate and in relation to the size of the share of government bonds purchased by the Riksbank. By the end of 2017, when the Riksbank policy rate amounted to ‑0.50 percent, short-term investors in government bonds faced interest rates close to ‑0.90 percent. Thus, given the policy rate, monetary policy became more expansionary.
However, there is a lower bound for how far below the policy rate the Riksbank can lower the rates on government bonds. By invoking the repo facility provided by the Swedish National Debt Office, primary dealers can always invest money in government bonds at an interest rate corresponding to the Riksbank policy rate minus 0.40 percentage points.
ABOUT THE RIKSBANK’S STAFF MEMOS
A staff memo is a form of publication from the Riksbank and a complement to other publications, such as Economic Commentaries and Riksbank Studies. A staff memo provides members of the Riksbank’s staff with the opportunity to publish advanced analyses of relevant issues. It is a publication for civil servants that is free of policy conclusions and individual standpoints on current policy issues.