March 10, 2020 / 9:00 AM / 24 days ago

UPDATE 2-Swedish central bank ready with liquidity support if big hit from coronavirus

* Liquidity measures most important if needed

* Plenty of liquidity at the moment

* Rate cut not top of agenda

* Repo rate currently at zero

* Next scheduled rate announcement due on April 28 (Adds further comment, extra govt spending plan)

By Simon Johnson and Johan Ahlander

STOCKHOLM, March 10 (Reuters) - Sweden’s central bank is ready to boost access to liquidity for banks if the financial system takes a hit from the coronavirus, it said on Tuesday.

Stock markets around the world have tumbled in recent days as worries mount that supply chain disruptions for companies and effects on consumers will cause a sharp downturn. Around 250 people have tested positive for the virus in Sweden.

Central banks have said they are ready to respond — the U.S. Federal Reserve has already cut interest rates — but that governments will also need to loosen the purse strings. Sweden’s government is already preparing a supplementary budget.

The Riksbank said some coronavirus impact was unavoidable and that while its quantitative easing programme has ensured there is liquidity in the financial system, that could change.

“The Board’s judgement is that the Riksbank’s balance sheet should not, if nothing else, decrease in the coming year,” Governor Stefan Ingves told parliament’s finance committee.

If more is needed, the Riksbank could offer more generous terms for loans to banks or purchase securities directly.

The Riksbank already holds around 45% of the outstanding stock of Swedish government debt, so it would probably need to widen the pool of assets it buys if it were deemed necessary to expand its balance sheet.

Local authority debt, corporate bonds and mortgage-backed securities are options but each has problems. The local authority market is relatively small, while the central bank has long fretted about an overheated housing market.

Buying corporate debt would mean deciding on what level of risk to take, while the market is dominated by big companies which may have less need of extra liquidity than smaller firms.

Deputy Governor Anna Breman said loans via banks could be a better option than direct purchases.

“We see that as more appropriate than buying corporate bonds where we would only reach the bigger companies which in reality aren’t having any greater problems as we see it today,” she said.

But the Riksbank looks unlikely to follow the example of the Federal Reserve and cut its benchmark interest rate.

“In the current circumstances, it is more reasonable to use the balance sheet and to try to make sure that the money ends up where it will have most effect,” Ingves said.

“Compare that to changing the repo rate which trickles down, as it were, on everything.”

The Fed slashed rates by 50 basis points on March 3 and markets expect it to do more.

The Riksbank held its benchmark rate unchanged at zero in February after ending nearly five years of negative rates at the end of 2019.

Its next policy decision is due on April 28.

Additional reporting by Stockholm Newsroom; Editing by Niklas Pollard and Catherine Evans

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