Swedish households can count on lower interest rates for another couple of years after the Riksbank and its governor, Stefan Ingves, presented the first monetary policy forecast and interest rate announcement of the year yesterday.
The Riksbank highlighted a number of uncertainties in Europe, for example the economic effect of Brexit and forthcoming elections in the Netherlands, France and Germany. Ingves also warned of residual problems concerning toxic loans in European banks.
The bank has decided to extend the mandate which facilitates quick intervention on the currency market. However the forecast is based on a more stable series of events with inflation and interest rates normalising at a steady rate. The key interest rate remains unchanged at a negative 0.5 per cent and the new forecast states that a further lowering of the repo rate to -0.6 per cent is more likely than it being raised.
The outlook for the proposal of a new financial tax is not looking bright. After heavy criticism Finance Minister Magdalena Andersson is wavering.
Critics believe the tax would affect 318,000 companies, compared to the 10,700 that are actually active within the financial sector, according to the Swedish Tax Agency (Skatteverket).
Magdalena Andersson said on Tuesday, “Given that it has such a wide impact, it is uncertain that it would fulfil its task.” She says the responses to the proposal will now be looked at in detail but she is not ruling out the idea of a banking tax. “We want the banks, in one way or another, to be able to contribute more,” she says.
Statistics Sweden is to publish December’s inflation data on Thursday and experts are forecasting that inflation will reach its highest level in more than five years, which is bound to delight Sweden’s central bank, the Riksbank.
Swedbank, for instance, has forecast that the CPIF will rise to 1.8 per cent in November, while SEB has forecast 1.9 per cent. CPI is expected to be a fraction lower.
The bad news is that the expected increase is linked to the rise in oil prices rather than to enduring factors such as price increases on services.
In February the Riksbank will have had negative interest rates for two years. The extreme interest rate situation has forced pension companies to hunt for returns while producing halcyon days for property companies.
In DN today, governor of the Riksbank, Stefan Ingves, defends the policy. “Negative rates have been a success. Inflation is now rising and is expected to climb to two per cent. At the same time we are experiencing good growth and employment is growing,” he says. According to the Riksbank’s most recent forecast negative interest rates will remain unchanged until the beginning of 2018.
Ingves believes that as long as the Riksbank sticks to its guns then the improvements will continue and abandoning negative rates too early could have serious consequences: “the krona would probably quickly rise against other currencies. Then exports would fall and unemployment increase. Meanwhile inflation would slow and diverge from the path to the two per cent goal.”
The National Institute of Economic Research said on Thursday that its Economic Tendency Indicator had climbed for a third successive month (ed.), from 106.2 in October to 107.9 in November.
SEB economist Carl Hammer commented that this indicated continued strong growth in the economy and that “it is pretty obvious that we do not need another round of expansionary monetary policy”.
Nordea’s Andreas Wallström noted that the indicator points towards GDP growth of 5 per cent, while colleague Torbjörn Isaksson highlighted the fact that retailers are signalling more modest inflation at the same time as household expectations on inflation had risen.
Deputy Riksbank governor Martin Flodén told reporters that the central bank’s forecast for the Swedish economy is starting to be a little on the low side compared to other forecasts, and that he had noted the Economic Tendency Indicator had climbed.
However, he is not convinced that this should lead to the Riksbank upwardly revising its forecasts.
Fund managers around Europe, Asia and the US have expressed surprise in the past six months over the Riksbank’s negative interest rates and bond-buying programme in the midst of a boom merely because inflation is not around the 2% target, writes business daily Dagens Industri.
The portfolio managers’ concerns over the Riksbank have resulted in an aversion towards the krona, which has fallen against virtually every other currency in the world. The Riksbank’s speculative dealings are costing taxpayers in Sweden billions, argues the paper
The board of the International Monetary Fund, IMF, has stated that Sweden’s economy continues to develop well but the government ought to deal with growing household debt. It predicts Sweden’s GDP to increase by 3.4% this year and 2.4% next year. The budget deficit is expected to be small this year and next year despite migration costs and investments in training and the labour market.
“Despite beneficial conditions on the labour market it still takes too long to get new arrivals into work, and unemployment is high among workers born abroad with little education,” writes the IMF. It also suggests reforms are needed to tackle the rise in house prices.
The Riksbank is discussing whether the bank should introduce a digital currency, an e-krona, and if it did so it would be the first major central bank in the world to do so, reports the Financial Times.
Deputy governor of the Riksbank, Cecilia Skingsley, says, “This is just as revolutionary as paper notes were 300 years ago.”
The Swedish krona has weakened markedly in recent years; it traded at 8.30 against the euro in 2011, compared to today’s 9.70, all the while the euro has weakened against the US dollar. With the exception of a couple of banana republics, no other country has become so poor so quickly. No one seems to care, apart from Riksbank governor Stefan Ingves who is actually celebrating. Why? Well, the weaker the krona, the more expensive imports become, which means the rate of inflation will rise, and this is exactly what the head of the central bank wants. The fact that Sweden is becoming poorer by the day does not seem to matter to the fundamentalists, writes business daily Dagens Industri. Everything is being sacrificed at the altar of monetary policy.
Governor of the Riksbank, Stefan Ingves, says that Sweden is living dangerously, and he is still concerned about household debt. “Debt has gone up over a long period and great numbers are borrowing with variable rates and little amortisation. These are all the classic signs that it could be really troublesome,” he says.
Measures such as interest rate deductions, the rental system and house construction have so far been focused on new mortgages not the entire lending stock. It is too early to say what the effect of the new amortisation requirement will be but Ingves does not believe it is enough. He also considers there to be risks associated with the European banking system, which is not completely stable after the crisis.