Cecilia Skingsley: High inflation and a rising repo rate – what happens to the Riksbank's balance sheet?

"The relatively short maturity on the Riksbank's asset holdings means that the majority will mature within three years, if the Executive Board chooses to conclude its reinvestment programme. In my opinion, this makes it unlikely that the Riksbank will need to sell securities to shrink the portfolio.” This was one of the points made by First Deputy Governor Cecilia Skingsley when she spoke Handelsbanken in Stockholm on today.

Date: 06/05/2022 12:00

Speaker: First Deputy Governor Cecilia Skingsley

The speech is about how the asset purchases have helped to support the Swedish economy through two years of a pandemic, and about how the securities portfolio should be managed going forward.

The portfolio that the Riksbank built up during the pandemic stopped growing last year. Since then, through reinvestments, the Executive Board has kept the size of the portfolio unchanged, but now the next step in the monetary policy restructuring is taken when the portfolio begins to shrink.

"To act vigorously and sustainably with a broad set of monetary policy tools was vital in supporting the economy. Now that inflation is rising, the best order will be to raise the policy rate first and then let the portfolio shrink”, said Cecilia Skingsley.

In her speech, she notes that the acquisition of securities, reinvestments and portfolio reductions will be a recurring monetary policy tool for central banks in the future.

“The global financial crisis and also the pandemic have showed that the so-called lower bound for the policy rate was a real constraint on monetary policy. Moreover, turbulence in the financial markets may hamper the ability of monetary policy to reach out to companies and households. The lesson in many countries is now that asset purchases can be the solution to both of these problems.  Further more, in countries where the supply of credit is not only created through banks but also through market financing, the central bank needs to be able to take broader measures, including the purchase of private securities, if necessary."

Updated 06/05/2022