Often we are told in Britain of the Scandanavian nations and Sweden in particular setting a good example and they are regularly held up as a model to follow. This particularly happens in the areas of social policy and education. However the last year or so has seen developments in monetary policy which has had me musing if they are setting a template for the future for all of us. This is in the area of negative interest-rates and expansionary monetary policy when you have an economy which is expanding and indeed booming. This is an inversion and some would say perversion of monetary policy theory where a central bank is supposed to lean against trends rather than give them a further push!
Denmark provides an example of this if we examine the situation described in the latest monetary review of its central bank the DNB. A Martian economist might think that things were going well at this point.
GDP growth in Denmark is expected to be 2.0 per cent this year and to remain at that level in 2016 and 2017. The projection thus reflects continuation and strengthening of the upswing that has already been underway for some time.
However our Martian economist will be scratching his or her head a little at this bit.
(The DNB) reduced the rate of interest on certificates of deposit on four occasions in January and early February, to -0.75 per cent. This is an all-time low for a Danish monetary policy interest rate.
The combination of solid growth with little or no consumer inflation might seem like not far off economic nirvana so why mess with it? We are seeing domestic policy in Denmark being made subservient to the exchange rate which is pegged to the Euro. A type of competitive devaluation our Martian might think should he or she be aware of the 1920s and 30s. Also our Martian would exclaim “you don’t say!” at this bit.
there is a risk that a prolonged period of very low interest rates will trigger an unhealthy development with self-reinforcing price rises for owner-occupied dwellings.
Ah a house price boom, what could go wrong? For now Denmark has a monetary environment where many mortgage bonds trade at negative yields and where households are unsurprisingly keen to remortgage.
indicating that the volume of remortgaging is exceptionally high, as was also the case last quarter.
So Denmark has potentially sacrificed balance in its internal economy on the altar of keeping its Krone pegged to the Euro. Unless of course you think that issuing Treasury Bills at -0.98% as it has done this morning – yes the investor and not the government is paying interest – is (the new) normal.
This is an even more extraordinary development as it has not been forced down this particular path by a type of fixed exchange-rate policy. Indeed as it is supposed to have a central bank accused of being “sado-monetarists” by Paul Krugman you might wonder even more about its current path. Back on February 11th they made a move which would confuse our Martian economist even more which I described the next day as this.
This is very significant as imagine if growth happens as they anticipate and inflation does pick-up at the policy horizon of circa two years then they have just made completely the wrong move!
They moved into negative territory with interest-rates cut to -0.1% but in a Krugmanlike state of mind they decided that not only this but some QE was required as government bond purchases were announced. Only a fortnight or so later we discovered that economic growth was running at an annual rate of 2.7%. So very strongly pro-cyclical monetary policy as they add a supercharger to an engine that was already turbocharged!
What happened next?
There was another cut to -0.25% on UK Budget Day as our Martian looked for some headache pills to stop his or her brain hurting. Now let me bring you fully up to date with some news from Sweden Statistics from this morning.
In March the annual growth rate for lending to households increased by 0.2 percentage points, from 6.2 percent in February to 6.4 percent in March.
As you can see the fear I expressed for Denmark seems to be bubbling along in Sweden and our Martian’s alarm would rise if we narrow our focus.
Housing loans account for 81 percent of total lending to households, and increased by SEK 160 billion to SEK 2 526 billion. The annual growth rate was thus 6.8 percent in March.
This boom has been at least partly caused by the fact that mortgage-rates are very low and have been falling. The numbers below compare to 2.43% a year ago.
Households’ average interest rates for housing loans for new agreements from MFIs fell from 1.81 in February to 1.74 percent in March.
Rather then being middle of the road that seems “chirpy,chirpy,cheap,cheap” to me and it would appear that Swedish companies think so too.
Most of the loans to non-financial corporations comprised loans with multidwelling buildings as collateral.
So there you have it a housing market which is being pumped up and a money supply which is either growing at an annual rate of 13.8% (M1) or 7% (M3). If we take a rule of thumb for wider monetary growth of 7% we subtract expected economic growth of 3% and get inflation of 4%. Thus a central bank of “sado-monetarists” would be singing along with Dawn Penn.
The Riksbank this morning
Firstly it confirmed its view that the outlook is bright from its eyrie by upgrading its economic growth forecasts.
The expansionary monetary policy is having a positive impact on the Swedish economy…….GDP growth in Sweden is good and the labour market is continuing to improve.
Thus our Martian looking at surging money supply growth and in particular lending for mortgages and housing would be expecting a tightening of policy. But instead rather than an economics text-book it would appear that the Riksbank has been reading Alice In Wonderland recently.
My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.
So rather than a tightening we got an expansion.
the Executive Board of the Riksbank has decided to purchases government bonds for a further SEK 40-50 billion.
Also a hint of more interest-rate cuts combined with a Forward Guidance style promise of lower interest-rates for longer.
In addition, the repo-rate path has been lowered significantly compared with the decision in February. The repo rate has been left unchanged at −0.25 per cent but may be cut further.
And in a Mad Hatter style panic they appeared willing to throw the kitchen sink at things.
The Riksbank is also prepared to launch a programme for loans to companies via the banks and to intervene on the foreign exchange market………..Purchases of other assets than government bonds are also a possibility.
I think that in terms of possible monetary expansion that is about it, for now at least! Although for some who had in my opinion really got carried away with their rhetoric that fact that there was not an interest-rate cut today was a surprise. Of course Lewis Carroll got there first.
Why, sometimes I’ve believed as many as six impossible things before breakfast.
There is much to consider at the moment from monetary policy in the Nordic regions but I am afraid that not much of it is good. Sweden in particular but Denmark too seem set on a helter-skelter type monetary policy where the economy is sacrificed to the growth now gods with this sort of perspective about time.
Alice:How long is forever? White Rabbit:Sometimes, just one second.
You have to ask what is the Riksbank of Sweden afraid of? If we are being told the truth about the Swedish economy,it is time for it to be reminded of the words on the front of the HitchHikers Guide to the Galaxy which in big friendly letters says.
Meanwhile the Bank of England may be observing a far slower quarterly GDP growth rate of 0.3% and think it is missing out on this fashion for negative interest-rates! Especially if the current rally in the UK Pound continues (US $1.53+,1.40 versus the Euro,182 Yen). at which point in my opinion the Nutty Boys should be on repeat.
Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain