Today something really rather extraordinary has happened in the world of economic policy and I wish to combine analysing it with a continuing issue which is also rather extraordinary which I touched on in Wednesdays blog. Let us take a trip to Scandanavia and in particular to Sweden which is in the grip of a rather extreme monetary experiment.
Sweden’s GDP increased 1.1 percent in the fourth quarter of 2014, seasonally adjusted and compared to the third quarter of 2014. GDP increased 2.7 percent, working-day adjusted and compared to the fourth quarter of 2013.
To a cursory reader this may seem that things are going well. A solid annual rate of growth caused by an acceleration at the end of the year looks rather satisfactory. But wait because there is more.
The retail trade sales volume increased by 5.1 percent in January compared to the same month last year. Retail sales for consumables increased by 2.1 percent while retail sales for durables increased by 7.7 percent. The information is working day adjusted.
So an acceleration in economic growth has been followed by booming retail sales figures as Swedes relax into their armchairs and review a strong economic performance. Some of you may be wondering at what point under monetary theory the Riksbank will “take away the punchbowl” should the party continue? Oh hang on…
From the 11th of this month.
At the monetary policy meeting on 11 February, the Executive Board of the Riksbank decided to cut the repo rate to –0.10 per cent and to adjust the repo-rate path downwards somewhat.
This was not all as in another groundbreaking moment for Sweden the Riksbank decided to do something else as well as this.
A majority of the Board members also decided that the Riksbank shall buy nominal government bonds for SEK 10 billion.
Here we have a problem which is that these measures have taken place after a surge in the Swedish economy which in the past might indicate a tightening and not a loosening of policy! Of course the Riksbank should be planning some 18 months or so ahead so let us see if it sees barriers or some form of roadblock to future Swedish economic growth.
The Riksbank’s overall assessment is that growth is normal at present and that GDP will grow by 2.7 per cent this year, 3.3 per cent in 2016 and 2.2 per cent in 2017.
This is the moment at which Snoopy in the Peanuts cartoon series would say “Ahem!”. So growth is pre credit crunch normal and indeed may well have been boosted by past interest-rate cuts since this phase began back in December 2011 when the repo rate was cut from 2% to 1.75%. In fact if you believe that interest-rate cuts boost an economy when they are made near to zero or in a ZIRP world then the cuts from 0.75% to 0.25% made last July and the cut to 0% made last October have yet to fully work their way through the system. So they are applying a supercharger to the turbocharger or at least they think that they are! Others may be singing along with the Smiths.
Panic on the streets of London
Panic on the streets of Birmingham
I wonder to myself
Could life ever be sane again?
If only they had added Stockholm to the list in the way that they did Dublin?!
What is the claimed rationale for all this then?
It is all about inflation and in particular fears of disinflation and what many call deflation.
Inflation is very low and lower energy prices are expected to lead to low inflation over the next 12 months
However some care is needed here as of course central banks have overlooked above target inflation because economic growth is low. It would appear that the asymetry I have argued all along is being proved by the Riksbank as it ignores strong current growth and solid future growth due to in effect some negative inflation prints. But there is a nuance because it does not expect the inflation to continue in such a low/negative vein.
Underlying inflation, for example the CPIF excluding energy, appears to have bottomed out and to be increasing. Wages and prices are expected to rise at a faster pace as resource utilisation increases. Import prices are also expected to rise as a result of the international recovery
and to contribute to higher inflation.
So they are cutting on the grounds of what they argue is a temporary fall in consumer inflation? Somewhere along this path we are not being told the full truth and may not be being told much truth at all. For those who worry that something is wrong in the world’s financial system such moves only exacerbate the fear and worry. The state of play here was summed up by the nutty boys.
Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain
Hey, madness, madness, I call it gladness, yee-ha-ha-ha
I’ve a-got a heavy due
I’m gonna walk all over you
Madness, madness, they call it madness
Negative interest-rates for savers and bank depositors
This subject is one which no doubt would wake up even the gentleman who slept though Paul Johnson’s presentation at Wednesday’s Inflation Report Public Meeting! Here is the Riksbank discussion.
Is there not now a risk that banks will in turn introduce negative interest rates, or some kind of fee, for the customers’ savings or wage accounts?
The reply really does give us an insight in the rarified world in which central bankers now inhabit.
Mr Jansson’s assessment was that this risk is limited for at least two reasons. First, this would of course not be a very popular measure among the banks’ customers……..
Second, the costs that the banks will incur as a result of the negative interest rates are not particularly substantial.
So banks only do what is popular with customers then Mr Jansson? In the UK we have FOREX and LIBOR manipulation and of course Payment Protection Insurance miss-selling and a vast range of savings interest-rate cuts. Perhaps the £11 million annual remuneration of the head of Lloyds Banking Group announced this morning also goes on the list. I am sure that readers have their own list! In a way the latter statement is as unworldly as those who are used to dealing with banks will be very aware.
Portugal and its amazing world of bonds
By the time that you read this then the latest GDP (Gross Domestic Product) numbers for Portugal will probably be published. However it has done better up to the third quarter of 2014 but you see in a link with the past the annual growth rate is 1.1% which if you look back over Portugal’s history is about its long-term growth rate in the good years. For now let us draw a discreet veil over the bad ones. But such a performance cannot support a national debt to GDP of 131% and rising. Yet even the new record numbers I discussed on Wednesday have been replaced by this. From Bloomberg yesterday.
Portugal’s 10-year yield dropped two basis points, or 0.02 percentage point, to 2 percent as of 9:27 a.m. London time and touched 1.998 percent, the least since Bloomberg started tracking the data in 1997.
Actually it is now 1.88% which does not leave much of a margin for default risk does it?
There are dangers in international comparisons such as different currencies but the UK ten-year Gilt is at 1.78% as I type this.
It is hard to get over how wrong the two issues discussed today are. We have the inversion of economic policy and something of a perversion and inversion of bond yields. Could a country which is likely to default (Portugal or Italy) have a negative bond yield? in that world economic may well be joining the late great Richard Feynman.
“I think I can safely say that nobody understands quantum mechanics.”
As to the Riksbank well its policy based on defeating some mythical deflationary beast will have had some food for thought from the news from Italy earlier.
In February 2015, according to preliminary estimates, the Italian consumer price index for the whole nation (NIC) rose by 0.3% compared with the previous month and declined by 0.2% with respect to February 2014 (the annual rate was -0.6% in January 2015).
Oh and in line with one of the comments yesterday it was introduced as shown below on twitter.
Italian prices unexpectedly rose in February.
Like the oil price rise of 16% (Brent Crude) that has unexpectedly happened in the past days and weeks of February?