Sweden’s central bank, the Riksbank, has kept its benchmark interest rate, the repo rate, at a record low of -0.35 per cent, but says it is ready to do more if needed. Market reaction was muted yesterday although the Swedish krona strengthened against the euro.
In a press release, the Riksbank said it had upwardly revised its forecast for GDP growth to 3.7 per cent this year and 3.6 per cent in 2016, as a result of strong economic activity.
However, the housing market is “out of balance” and it is of the utmost importance that the measures are taken to create a better balance between supply and demand, and reduce the incentives for households to take on debt, the bank said (ed.).
In a report from the Swedish Export Credit Corporation (SEK) to be released today, 200 export businesses are cautiously optimistic about the business climate, but headwinds lie ahead. A tough funding environment, uncertainty on world markets and the ineffectiveness of the Riksbank’s monetary policy are the main storm clouds on the horizon.
The central bank’s monetary policy is aimed at making the Swedish krona weaker. Despite this, many of the businesses polled expect the Swedish krona to strengthen. “This means that many do not really listen to or believe in the Riksbank’s rhetoric,” says Marie Giertz, SEK’s chief economist.
Sweden’s economy grew twice as fast in the third quarter as economists had forecast, fuelled by rising consumption and investment. Exports also contributed to the growth, even if imports increased at a similar rate.
The economy expanded 0.8% in the quarter, said Statistics Sweden. At an annual rate, the economy grew by 3.9%. The Swedish krona strengthened by 5 öre against both the dollar and the euro on the news.
With the ECB expected to deliver more stimulus on Thursday, the pressure is on the Riksbank to cut the repo rate again in December. “However, the figures speak against any action by the Riksbank,” said Annika Winsth, Nordea’s chief economist.
Falling house prices and a sharp decline on the stock market could pose a serious shock to the economy, warns the Riksbank in its latest financial stability report. Indebtedness in the household sector has increased since June to an average quota of 175%.
The mandate for macroprudential policy of the Financial Supervisory Authority (Finansinspektionen) should be clarified as soon as possible, as well as further necessary measures to manage households’ indebtedness, urge Stefan Ingves, the Riksbank governor and Kasper Roszbach, head of the financial stability department.
“Although asset prices have partly declined recently the Riksbank’ analysis shows that current valuation of Swedish equities is high by historical standards, and therefore implies an elevated risk of a fall in equity prices,” states the report.
The Swedish Competition Authority (Konkurrensverket) has rejected the government’s plans to introduce an amortisation requirement, saying that the lack of competition in the banking market would worsen further.
Instead the Competition Authority wants new and tougher lending requirements to be imposed on the banks. Not only would banks be able to offer a range of services designed to suit customers better, but customers would be less likely to stay loyal to one bank for years, instead switching to the bank that provides the best offer.
The Riksbank has held its benchmark repo rate unchanged at a negative 0.35% and has said it will expand its bond buying programme by SKr 65 billion to a total of SKr 200 billion.
The central bank expects to keep the repo rate low until 2017 even though inflation is showing a clear upward trend. However, there is still considerable uncertainty regarding the strength of the global economy and central banks abroad are expected to pursue an expansionary monetary policy for a longer time.
Negative interest rates will continue to have an impact on house prices, and Riksbank Governor Stefan Ingves yesterday reiterated that the Swedish housing market is “out of balance”, and that politicians must ensure that an amortisation requirement is put in place.
Concerns about Sweden’s housing market bubble are spreading, writes Dagens Industri (DI) in an analysis. However, too few see the link between rising household debt and the currently extremely low interest rates, continues the paper, and calls on politicians to take control of the situation before the housing market bubble bursts.
The fact that the Riksbank’s policy has helped inflate the bubble has gone unmentioned in the news, claims the paper, saying the time has come for the government to rein in the governor of the central bank.
Sweden’s Riksbank announced on Thursday that it was leaving the repo rate on hold at -0.35% but was prepared to make monetary policy even more expansionary, if necessary.
“In the desperate hunt for inflation the Riksbank is leaving no stone unturned …. The autopilot is switched on at 2% inflation and the cure is negative interest rates in a country with annual growth of more than 3%,” comments business daily Dagen Industri’s Henrik Mitelman today.
The Riksbank is doing everything in its power to keep the Swedish krona weak. The stronger the currency, the lower the Consumer Price Index – and the bank wishes to avoid that at all costs, he suggests.
Mitelman believes that the Riksbank has painted itself into a corner, prepared to cut interest rates further. What the bank has failed to bear in mind is that interest rates in negative territory will only lead to even higher levels of household debt. Furthermore, the bank’s governors are oblivious to the fact that they are the ones who are so carefully laying the groundwork for the next financial crisis, he concludes.
A DI survey reveals that Sweden’s ten largest private employer organisations all believe that the Riksbank will fail to attain its inflation target.
Lars Jonung, professor of economics, says the time has come for the central bank to admit that it will take time to reach the target given the low global inflation, and that the Riksbank should reintroduce a tolerance range.
Sweden’s welfare sector faces a massive funding crisis, writes Robert Boije, head of social policy issues at the Swedish Confederation of Professional Associations (Saco). He criticises the political blocs over their inability to explain to the voters how they intend to solve the looming crisis with the tax system.
“It would not be out of place in the upcoming autumn budget proposals to provide concrete information on how the funding crisis will be solved,” writes Boije.