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.

Missed inflations targets could be made flexible

Despite lowering the repo rate to -0.50%, the Riksbank has failed to bring up inflation to the two per cent target, which the bank’s leadership has been criticised for. The Riksbank now says that inflation targets could be made more flexible and a divergence of a percentage point up or down from the target could be allowed.

  However Professor Lars Calmfors is critical. “This creates a greater uncertainty than what the Riksbank is aiming for. It is adapting to what has happened and increasing acceptance for divergence and there is no reason for that.”

  However Annika Winsth, head economist at Nordea, welcomes the Riksbank’s thinking. “This has been eagerly awaited. We have long said that it would be better with a flexible view on inflation. They have fastened onto something that does not benefit Sweden.”

Indebted households not Ingves’ problem

The Riksbank said on Wednesday that it would leave its benchmark repo rate unchanged at a negative 0.50 per cent and that its bond purchase programme was running to plan.

Governor Stefan Ingves does not believe the central bank’s expansive monetary policy is overheating the economy. “Not as far as we can see at present. We believe inflation will reach 2 per cent sometime next year, we believe growth will be healthy in the coming years and unemployment will fall,” he has said to Svenska Dagbladet.

He reiterated his warning that low interest rates increase the risks associated with high levels of household debt and called for political measures to be taken.

He also said he would have no qualms about raising interest rates when the time was right, even if a number of households would find an increase problematic.

Review of Riksbank

A parliamentary commission of inquiry should be appointed to review the role of the Riksbank and interest rate policy, according the Riksdag Committee on Finance.

“We have agreed on a broad review of all the important issues regarding the Riksbank. The only exceptions are the foreign currency reserve and asset management, where we instead welcome suggestions,” Fredrik Olovsson, the Social Democratic chair of the Committee, has said.

He told Dagens Nyheter that macroprudential supervision would not be under review either.