The risk that low inflation could become entrenched caused the Riksbank to cut its repo rate by 15 basis points to -0.5 percent on Thursday. The central bank is no longer speaking of a “clear upward trend” in inflation, instead stating that it is “not yet on solid ground”.
The Riksbank said that the economy continues to strengthen but inflation is expected to be lower in 2016 than was previously forecast. The period of low inflation will therefore be longer. This increases the risk of weakening confidence in the inflation target and of inflation not rising towards the target as expected, and the bank is prepared to make monetary policy even more expansionary, if needed.
Swedbank noted that the central bank’s credibility is at stake, thereof Thursday’s cut in the repo rate. “… the Riksbank could have cut the rate in December, and since then most of the information has been negative, not least the inflation outcome,” said the bank.
SEB underlined that the Riksbank decision was not unanimous and that there are indications that Sweden is beginning to approach the limit of the super-expansionary policy.
“Interest in the Gripen is greater than ever. We have a handful of countries that are interested in the Gripen E and F (one-seat and two-seat versions). We are in a situation where we are the only ones in the Western world who are developing a new fighter aircraft,” said Saab CEO Håkan Buskhe when he presented the company’s Q4 report yesterday.
India is one of the countries to which Saab hopes to sell the Gripen, and the company has stressed that it is prepared to meet India’s demand that the aircraft be manufactured in the country. Prime Minister Stefan Löfven (S) will visit India 13-14 February where he, along with Håkan Buskhe and a Swedish industry delegation, will meet Prime Minister Narendra Modi.
Commenting the development of a new trainer aircraft in a bid to win a US Air Force contract, Mr Buskhe told investors. “Our cooperation with Boeing is going extremely well and we have a concept that we are convinced will change the ‘training world’. We are very sure that we will be able to win contracts”.
Saab posted a profit after depreciation of SKr 1.34 billion for the fourth quarter. Sales amounted to SKr 10 billion, an increase of 36% on the corresponding period in 2014.
Market turmoil has increased to the point where it is beginning to resemble the crisis days of 2008-2009, and the central banks’ ability to respond to a weaker outlook, meet its targets for inflation and sustain risk appetite is being called into question, Nordea chief strategist Jan von Gerich has said in a market letter.
While much of the concern is justified, the fear of a global recession or another financial crisis is exaggerated. The central banks have not run out of ammunition yet, he added, while noting that the turmoil will affect confidence and thus economic development in the short term.
Swedbank’s CEO, Mikael Wolf, is to step down with immediate effect, following a board decision. Birgitte Bonnesen has been appointed acting CEO. She will also continue as the head of the Swedish banking division. Bonnesen has been a member of the senior management team since 2014 and has worked at the bank since 1987.
Sweden’s high-speed railway risks devouring half of all investment in infrastructure for a long time to come, notes Lena Erixon, the director general of the Swedish Transport Administration (Trafikverket).
Appropriations will need to be increased by as much as SKr 10-15 billion annually, otherwise other important projects are likely to be affected, she warns.
In a letter to the government, the Swedish Radiation Safety Authority (Strålsäkerhetsmyndigheten) has requested an increase in the charges that nuclear power plants pay for handling radioactive waste. The authority has analysed the decision to decommission four of the country’s ten reactors early and concludes the charges must be raised to finance the decommissioning of the reactors and the management of the used nuclear fuel.
The rise in cost would increase the pressure on the nuclear power plant owners who are already raising the alarm that all reactors may be forced to close due to poor profitability.
State-owned Vattenfall has reported a record loss for 2015, the worst in the company’s history. With a loss of SKr 19.8 billion, it is almost double as much as the loss the previous year.
Vattenfall’s CEO, Magnus Hall, pointed out the company is still making reasonable profits in operations. It is mainly the writing down of assets and falling electricity prices that triggered the huge reported loss. The single largest write down was due to the closure of two of the four reactors at the Ringhals nuclear plant.
Magnus Hall warns that all the reactors, which supply a significant portion of Sweden’s electricity, could close if nuclear output tax is not removed, “and a decision is needed before the summer,” he says. He states that political action is needed to avoid Swedish nuclear power closing down early, and Vattenfall is unable to make necessary investments if the tax is not abolished.
The government has gone ahead with a proposal to exempt new builds from tighter mortgage rules as a way of helping the construction industry retain profits and price levels as a way of tackling the housing shortage.
However today, the Swedish Bankers’ Association (Bankföreningen) is issuing a warning against exempting new houses from new, tighter mortgage rules. The association warns that the risks of loans for new productions are just as high as for existing housing, it could lead to a segmented housing market, and the purchase prices for new-builds will not meet the market value of the housing; for example a newly built apartment which cost SKr 5 million could fall by SKr 500,000 once on the market as a used property and when it is no longer exempt.
Two weeks ago the Swedish government raised its target over the number of new homes it wants built, from 250,000 by 2020 to 700,000 by 2025.
“Given the resources available in Sweden, it’s not realistic,” says JM CEO Johan Skoglund.
NCC CEO Peter Wågström is also sceptical, saying it will be difficult to achieve such volumes in the short-term.
The Riksbank says its main priority is to bring inflation up towards the target of 2 percent and is therefore prepared to take action to safeguard confidence in the target.
In an address to the Swedish Confederation of Professional Associations on Friday, Kerstin af Jochnick, first deputy governor, said the negative repo rate and bond purchases had brought the level of interest rates down, which had contributed towards “good growth in Sweden”.
… but low inflation becoming entrenched
The Riksbank is running out of weaponry and low inflation is likely to become entrenched, warns Annika Alexius, a professor at Stockholm University’s Department of Economics, and one of the keenest critics of the central bank.
Alexius says the Riksbank would not be in this position, had it focused on inflation as early as 2012. She also warns that the Riksbank is likely to face huge losses in the wake of its bond purchases.