There are some signs that Swedish monetary policy may havereached its limits.

Over the past year, mortgage rates haven't budged andcorporate loan rates have seen only marginal declines. That'sdespite the Riksbank driving its main lending rate well below zeroand pushing through wave after wave of record bond purchases todrag down longer-term rates.

Policy is “already so extreme that we've already lost thatinterest rate sensitivity, and you will get very small effects onthe economy from more rate cuts,” said Robert Bergqvist, chiefeconomist at SEB, the Nordic region's biggest currency trader.Rates are unlikely to fall further because banks pass on negativerates to their corporate customers, he said.

The Riksbank resorted to extreme policy measures back in early2015 in an effort to keep pace with the European Central Bank(ECB). Swedish policy makers have also floated the idea ofintervening in the currency market to stop a strong kronaundermining efforts to revive inflation.

As the pass-through mechanism for borrowing rates becomes lessefficient, any further Riksbank easing will mainly focus onstabilizing inflation around its 2 percent target by ensuring thekrona doesn't strengthen too much, according to Bergqvist.

Swedish core inflation was 1.4 percent last month, remainingstubbornly below the Riksbank's 2 percent target for a 68thconsecutive month.

There have been some recent gains in consumer prices, thanks inpart to a weaker krona. Sweden's currency closed at a six-year lowagainst the euro on Wednesday after Governor Stefan Ingvesemphasized that monetary policy can't stray too far from centralbank measures being enacted outside Sweden. Deputy Governor PerJansson said the Riksbank needs to track what the ECBdoes closely to avoid any sudden currency market setbacks.

“This is a krona story—the reason why they're doing what they'redoing,” said Torbjoern Isaksson, a chief analyst at Nordea, thebiggest Nordic bank. “They want to buy time by having a weak kronaboost import prices, while hoping that more domestic and genuineinflation will eventually take over the baton and liftinflation.”

Both Nordea and SEB predict the Riksbank will be forced tolaunch a fifth round of government bond purchases later this yearto keep up with the ECB's record stimulus program.

Martin Floden, one of the Riksbank's six deputy governors, inFebruary joined another board member in opposing the latest ratecut to minus 0.5 percent. He questioned the effect of the move oninterest rates elsewhere in the economy. But the Riksbank GovernorStefan Ingves doesn't see the issue.

“If you look at, for example, the supply of loans tocompanies, growth is steadily at decent levels so you can't claimthat there are any problems on the Swedish credit market,” Ingvessaid after a hearing on Wednesday in Stockholm. “You can't expectan absolute adherence one-to-one” between the Riksbank rate andinterest rates passed on to the public, he said.

He also said it might not be a “disadvantage if mortgagerates don't fall as much” given the concerns of a housing bubbleamid surging house prices.

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