Erik Thedeen, the governor of the Swedish central bank, revealed to lawmakers on Tuesday that the bank is facing huge losses and needs to apply to parliament for funding replenishment exceeding $7 billion.
Erik Thedeen pointed out at the finance committee meeting that based on preliminary analysis of its financial situation, the central bank's equity has fallen below basic levels and requires a capital injection of nearly 80 billion Swedish kronor (7.3 billion US dollars) to return to normal.
Officials plan to submit a petition to parliament in March 2024 based on the share capital of the Swedish central bank and the 2023 performance report, which includes plans to increase capital and 'increase income'. As the Swedish central bank announced its capital restructuring, the value of assets accumulated during periods of low inflation held by central banks around the world has shrunk. This development has prompted policymakers to reflect, as the cost of large-scale asset purchases, which have limited effects on stimulating price increases, has now become very clear.
In the eurozone, the losses caused by quantitative easing are most evident in the German central bank. However, officials across the eurozone are resisting the need for cash injections, emphasizing that such deficits may only be temporary.
The International Monetary Fund (IMF) recommended in a research report released in July that such short-term losses should not require government capital injections. Agustin Carstens, the President of the Bank for International Settlements (BIS), insisted in his speech earlier this year that even with negative net asset values, central banks can "and have effectively" operate.
The Swedish central bank began purchasing government bonds in 2015 to stimulate inflation and increased purchases of other asset classes during the pandemic to support the economy. At its peak in early 2022, the central bank held bonds and treasury bills with a nominal value of nearly 1 trillion Swedish krona ($91 billion). The bank stopped purchasing at the end of 2022 and began selling government bonds in April.
The Swedish central bank lost 81 billion Swedish kroner in the 2022 fiscal year, reducing its equity to negative 18 billion Swedish kroner. This is far below the target level of 60 billion Swedish kroner and the threshold of 20 billion Swedish kroner, below which the central bank must demand additional capital from Congress.
Erik Thedeen said in a statement, "Negative equity will not affect the ability of the Swedish central bank to implement monetary policy in the short term. However, in order to maintain confidence in long-term independent monetary policy, it is necessary to give the Swedish central bank financial independence, which means having sufficient equity and income to cover its costs
These losses have also sparked domestic debate about the Swedish central bank's policy during periods of low inflation, during which the central bank maintained its benchmark interest rate below zero for five years and purchased government bonds to stimulate price increases. Some critics accuse overly loose monetary policy of causing the Swedish krona to depreciate, causing the currency to fall to its lowest level in history this year, while others believe that the Swedish central bank's better option is to further lower interest rates to negative values rather than buying bonds.
Martin Floden, deputy governor of the Swedish Central Bank, said in a speech last year that although there was no evidence that the initial asset purchase reduced the financing costs of enterprises and households, the bank expanded quantitative easing during the COVID-19 crisis, which helped to achieve rapid economic recovery and avoid a long-term recession.