Temporary factors help push inflation over 2%

The Consumer Price Index (CPI) rose by 0.5% in July. The 12-month rate was 2.2%. Price increases on package holidays contributed 0.3 percentage point to the change, while increased prices on international flights and electricity contributed 0.2 percentage points each.  The underlying inflation rate (CPIF) rose from 1.9% in June to 2.4% in July, its highest level since December 2010.

The Swedish krona strengthened on the news while the stock market fell. The reaction is justifiable given that the inflation rate is over the 2.0% target set by the Riksbank, which could bring forward plans to raise the benchmark repo rate, argues DI.

But, even if the July data may lift the mood at the central bank, it is too early to celebrate. A number of temporary factors contributed to the increase, as did a new way of measuring inflation and tax hikes on electricity.

Andersson: the economy is strong

Social Democratic Finance Minister Magdalena Andersson’s Friday began well as Statistics Sweden released its national figures for the second quarter. GDP rose by 1.7% on the previous quarter and by 4% compared to Q2 2016.

“The Swedish economy is clearly extremely strong… It stands out clearly if you make international comparisons,” said Magdalena Andersson.

The figures exceeded expectations and Andersson pointed out several contributing factors, including household consumption increasing by 1.1%.

Thriving FinTech industry

Financial technology, or FinTech, has become a thriving industry in recent years with Sweden topping the league for FinTech investments per capita. New payment methods via mobile phones and simpler forms of identification mean that payments can be made from virtually anywhere. But the development of these new services is not without risk and Sweden’s Riksbank warned of growing uncertainty in its latest financial stability report from May. The central bank has warned that deposits could become more volatile, thereby increasing the liquidity risk.

Concerns over tighter monetary policcy

In 2016 Sweden’s national pension funds reported aggregate earnings of SKr 118 billion, corresponding to an average return of 9.7%.

After five years of exceptional growth, which has primarily been fuelled by expansionary monetary policy, there are now indications that monetary policy will tighten.

Kerstin Hessius, the CEO of the Third Swedish pension fund (AP3), has expressed concerns over what will happen when Sweden’s central bank, the Riksbank, starts raising interest rates. She wonders if the adjustment will be dramatic, or orderly, saying that in the worst case scenario it will lead to significant “destruction of capital”.

Not right now

Finance Minister Magdalena Andersson has investigated several paths forward towards lowering interest rate tax deductions, she tells DI.

Experts, including the Riksbank, the Financial Supervisory Authority, the Swedish National Debt Office and the Swedish Fiscal Policy Council have been calling for these deductions as the most effective measure against Swede’s soaring debt.

The Left Party’s economic policy spokesperson Ulla Andersson, says it is time to override the Moderates on this issue, but Magdalena Andersson says that the issue is not current right now and there are other measures to stop debt growing.

Liberal economic policy spokesperson Mats Persson, says, “The Social Democrats and the Moderates are showing a lack of courage. The day that house prices fall then there will be a tough verdict against the political system, which despite warnings, did nothing.”

Interest rate unchanged

The central bank, the Riksbank, is leaving the benchmark interest rate, the repo rate, at a negative 0.5%. The decision was expected.

Riksbank governor, Stefan Ingves, said, “It is important that inflation is more permanently at two per cent and does not just touch on two per cent. For that reason it is pressing and important to continue with an expansive monetary policy for some time longer.”

The first increase in the repo rate is expected in the middle of 2018.

Moderates – corporate tax drop is a rise on the sly

Sweden is lowering corporate tax for the third time since 2009, now to 20% (see SPR 20/6 Early Ed.). However the Moderates are calling it a tax rise on the sly.

Finance Minister Magdalena Andersson wrote in a Dagens Industri (DI) debate article yesterday that the lower tax will be compensated for by limits to interest deductions.

The Moderates have welcomed the limits to the tax deduction, which aims to stop companies’ aggressive tax planning, although. Maria Malmer Stenergard, tax policy spokesperson for the Moderates, would have liked a larger cut in corporate tax as compensation.

Meanwhile the Confederation of Swedish Enterprise (Svenskt Näringsliv) welcomes the tax decrease but is critical of limiting the right to a tax deduction.

“We are lowering corporate tax”

Today the Ministry of Finance is putting out a memorandum on new tax for the corporate sector, write Finance Minister Magdalena Andersson and deputy Finance Minister Per Bolund in Dagens Industri (DI).

It proposes a general rule for limiting tax deductions for interest in the corporate sector in order to increase tax neutrality between different forms of financing. The memorandum also includes other proposals such as new tax rules for financial leasing, new hybrid rules, and a primary deduction for rental properties. Additionally, the current interest rate deduction rules are to be tightened. The proposals are fully financed and are proposed to come into force on 1 July 2018.

As limiting the tax deduction for interest means that the tax regulations are tighter, it is proposed that companies are compensated by lowering corporate tax from 22 to 20 per cent. This lower rate is fully financed by tightening the other rule. Thus the proposal is a redistribution of total tax within business.

The proposal is out for consultation before the government makes a final decision.

Tense wait for report

With France and Germany pushing for closer cooperation, the European Commission has outlined five scenarios for the future of the EU post-Brexit. Sweden has remained remarkably quiet about the white paper, but at lunchtime today the Commission is to release a report that has the potential to change this.

According a rumour in the German media last week, pressure will be put on Sweden to adopt the euro no later than 2025. The European Commission has denied that this is the case, but Roberg Bergqvist, chief economist at SEB, believes there is a grain of truth in the rumour.

Finance Minister Magdalena Andersson (S) is defiant, saying she will not accept a specific date. “It is up to the people of Sweden … to decide if and when Sweden adopts the euro. There is no other alternative,” remarks the minister, believing that there is understanding in the EU for this stance post-Brexit.

Criticism of plans to give watchdog extra powers

The Ministry of Finance wants the Swedish Financial Supervisory Authority (Finansinspektionen) to be given additional macroprudential tools, but a number of bodies are critical of the plans.

The Trade Union Confederation, LO, believes a review of interest rate deductions needs to be made before the watchdog further restricts household borrowing, while the Swedish Construction Federation warns that a debt-to-income ceiling will make it harder for the young and immigrants to get a first step on the property ladder; a view which is shared by the Association of Swedish Real Estate Agents.

The Swedish Bankers’ Association believes Finansinspektionen’s proposed mandate is too broad and far-reaching but Sweden’s central bank, the Riksbank, welcomes the proposal, given that current regulation does not correct financial imbalances.