A central theme of this blog since been the early days has been first to warn that negative interest-rates were coming and to warn about the implications and then to analyse the reality of them. This morning has seen another venture in this direction and these days it is not a surprise to find a Scandanavian country leading the way so let me hand you over to the Riksbank of Sweden.
The Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.10 percentage points to -0.35 per cent.
2015 has been an extraordinary journey for the Riksbank which entered it following a literal Zero Interest-Rate Policy (ZIRP) of 0% but then cut to -0.1% in February and -0.25% in March and now -0.35%.
Why has it done this?
In the opening salvo of its rationale the Riksbank joins the list of central banks (the Bank of England did so yesterday) warning about Greece. I guess it is an easy target.
But uncertainty abroad has increased and it is difficult to assess the consequences of the situation in Greece.
This is entwined with fears about the strength of the Swedish Krona.
the krona has also become stronger than the Riksbank had forecast and the development of the exchange rate remains a risk to the upturn in inflation.
In response to these two factors it feels that it needs to do this.
In this uncertain environment, monetary policy needs to be even more expansionary to ensure that inflation continues to rise towards the target of 2 per cent.
More Quantitative Easing Too
These days central bankers may make grand statements about the effects of cutting interest-rates into negative territory but if they really believed them they would not indulge in QE as well would they? The Riksbank is no exception.
purchases of government bonds extended by SEK 45 billion
It was only last night I was discussing the possibility of QE4 in the United States and this morning I find that the Swedes have beaten them to it as in spite of only starting QE in February they have found themselves having to keep upping the size. If the Riksbank needs a song for its website then this by Britney Spears seems appropriate.
I just can’t control myself, more
They want more?
Well I’ll give them more (ow!)
If we move to a measure of scale then one way of looking at this is that the Riksbank has not completed the last announced increase yet before announcing even more. So much for leads and lags in monetary policy as the full implications cannot possibly be evident yet. Or if you prefer at the end of 2015 it will own 20% of the Swedish government bond market whereas the ECB will own 8% of its.
Why have they needed more,more,more?
Bloomberg pointed out the problem the Riksbank has been facing just over a week ago.
Sweden’s 10-year government-bond yield, which traded as low as 0.2 percent in April, was at 1.1 percent on Tuesday. Its five-year yield was 0.4 percent, after trading below zero just two months ago.
There are technical monetary arguments saying that QE has in fact caused this by reducing liquidity. If so the Riksbank is on its way to making the situation even worse so watch this space!
Back in February the story we were told was very different.
monetary policy can be made more expansionary by purchasing government bonds.
Of course the official central banking view these days as recently expressed by Ewald Nowotny of the ECB is that bond yield rises are good (as they indicate better economic expectations). This has replaced the previous view that bond yield falls created by QE policies are good. So everything is good and a success with the only exception being bond yields being unchanged. No doubt someone will be along soon to declare that a success too! All very 1984 isn’t it?
Other measures are also being considered
The Riksbank has previously suggested it may intervene directly in the foreign exchange market but today has seen a new suggestion as it looks for alternatives.
Purchases of other types of security are also a possibility, as is launching a programme for lending to companies via the banks.
It used to be a joke that central banks would end up buying every asset but the joke has morphed into near reality. Sweden may soon be chasing Japan and Sweden on that particular road to nowhere.
Also as to foreign exchange intervention, well good luck with that! Perhaps they might like to look at Switzerland although of course its central bank seems to have learnt very little if anything.
A complete change in monetary theory
Back on the 29th of May I pointed out that Sweden was undertaking an extraordinary economic experiment.
With a narrow money annual growth rate of 13.5% it is certainly doing the central banking equivalent of splashing the cash. The economic experiment is to do this in an economy that is growing solidly. Even the argument of low and negative inflation will fade away if the price of crude oil remains where it is now.
Okay so what does the Riksbank think now?
GDP will grow faster than the historical average in the coming years . Indicators also point to increasingly bright prospects for the labour market. Employment is continuing to rise and unemployment is gradually falling.
So to coin a phrase the future is bright,so they are cutting interest-rates and adding to QE. This certainly provides food for thought about what they would do if Sweden expected economic weakness? Interest-Rates of -1%,-2% or -3%? QE to infinity?
Oh and you may have a wry smile at this after the section above discussing bond market developments.
An analysis of data from the financial markets shows that the Riksbank’s asset purchases have also had the intended effect.
Never believe anything until it is officially denied…..
What about house prices?
A feature of these times is that asset prices surge. One example of this is booming equity markets but another is the creation of house price rises and in some cases bubbles.
The Riksbank has pumped up the mortgage market.
Financial market statistics show that the average mortgage rate fell further up until the end of May and is now at all-time low levels. Since the turn of the year, it has fallen by 0.3 percentage points to 1.7 per cent.
Presumably today’s move will add to the downward pressure on mortgage-rates, so what about house prices?
According to statistics from Valueguard, prices of tenant-owned housing increased by 18.3 per cent and house prices by 13.1 per cent in May, expressed as an annual percentage change.
I would just like to point out that this is the most extraordinary part of the experiment as the Riksbank cuts interest-rates and adds to QE in such a situation.
According to SEB’s housing price indicator, households expect prices to keep on rising.
There are other consequences of this.
The development means that the debt-to-income ratio, i.e. debt as a percentage of households’ disposable income, will increase to about 188 per cent in 2018,
Such developments will make future interest-rate increases more difficult as the Riksbank ties itself ever more into a situation described by Coldplay.
Oh, no, what’s this?
A spider web, and I’m caught in the middle,
So I turned to run,
The thought of all the stupid things I’ve done,
Also I think that first-time buyers in Sweden will already be singing along to its most famous pop music export.
S. O. S.
A message for the Bank of England
The UK often follows Swedish developments. Also there are a lot of similarities like a booming house market for example, economic growth and a strong currency. Now if Sweden cuts interest-rate because its currency is too strong the UK will raise them because its currency is even stronger? As Snoopy would say whilst lying on top of his kennel. Ahem!
When the UK began its strong currency status in March 2013 one UK Pound £ bought 9.6 Krona and now it buys 13.1.
Today’s article points out that the Riksbank is now indulging in monetary policy of which even Paul Krugman of the New York Times would approve. Ignore any housing bubbles or economic growth and push the pedal to the metal anyway is that drumbeat. Perhaps he rattled them with the description below back in April 2014.
Whatever their motives, sadomonetarists have already done a lot of damage. In Sweden they have extracted defeat from the jaws of victory, turning an economic success story into a tale of stagnation and deflation as far as the eye can see.
The “stagnation” line was somewhat bizarre if you look at Swedish economic growth but it turned the Riksbank into disciples as they travelled their own economic road to Damascus.
The ECB has expanded its QE program further into private-sector assets (Corporate Bonds) this morning. Did the Riksbank either know or suspect this? I will let readers decide for themselves if this is a new battlefront in the ongoing Currency Wars or a distinct war of its own.
Too Infinity! And Beyond!