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.

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.

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.

Riksbank critical of bank fees

In its response to the government’s proposal to raise bank fees for the resolution reserve (which could be used in the event of a financial crisis – ed.), the Riksbank has said that it is uncertain whether the increase in the fee would really boost resources for handling a crisis. The Swedish reserve does not consist of an actual fund and there are no liquid assets earmarked for bank crisis management, the central bank points out. The bank believes the government ought to consider whether there are better alternatives for strengthening financial stability.

Finance Minister Magdalena Andersson does not want to comment on the responses until they are analysed.

Riksbank leaves interest rate unchanged

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.

“Negative interest rates a success”

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.”

Booming economy

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.

Riksbank speculation costing billions

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

“We’re living dangerously”

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.