The Swedish economic experiment of negative interest -rates in a boom goes on

Today opens with relative calm in world financial markets although a little care is need as many central bankers are gathered at the annual symposium in Jackson Hole. After all we know that “loose talk costs lives” from the wartime warning. A subject that may well come up in private discussions is the monetary policy being deployed by the Riksbank in Sweden although it will be in its absence as I do not believe its representatives are in attendance. As an undercut to the discussions about promises and hints made by the Bank of England (Governor Carney is present) and the US Federal Reserve about interest-rate rises the reality of the Riksbank cutting interest-rates into negative territory in response to favourable economic conditions is an actual ying to their promised yang.

Indeed the whole concept of an exit strategy from “extraordinary monetary conditions” has in many ways been converted to an entry strategy by the Swedes. Perhaps they have been listening to too much Abba.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world
All the things I could do
If I had a little money
It’s a rich man’s world

What is the Riksbank up to?

First Deputy Governor Kerstin af Jochnick lets us know. She tells us that Sweden is a small open economy dependent on outside events. So what is happening there?

The assessment was thus that there are several factors pointing towards a favourable development in the global economy going forward,

Okay and what about Sweden itself?

Domestic demand is expected to continue growing relatively fast, partly due to relatively strong private consumption. The rising wealth level in the household sector and the low interest rates create scope for relatively high growth in consumption…… All in all, the increasingly strong demand, both domestic and international, means that GDP growth will be higher than the historical average over the coming years,

So the outlook is bright which is where we get to the crux of the matter because into this outlook the Riksbank did this in July.

We therefore decided to cut the repo rate by 0.1 percentage points to -0.35 per cent. We also resolved to extend the purchases of government bonds by a further SEK 45 billion until the end of the year.

An interest-rate cut and more QE into an expected boom? Actually there is more to it than that when we look at the scale of the operation. There is a lot of news about the European Central Bank QE but in relative terms it is dwarfed by the Swedish effort on one measure and similar on another.

This corresponds to around 20 per cent of the outstanding stock of nominal government bonds and around 4 per cent of GDP. If the ECB continues to buy government bonds at the same rate as so far, their purchases at the end of the year will correspond to around 7 per cent of the stock and, there too, to 4 per cent of GDP.

As the ECB started QE to help end a crisis there is a real question for apparently successful Sweden which has also had a boon from a weaker currency.

The weakening of the Swedish krona over the past year has meant that imports of goods and services has become more expensive, which tends to increase consumer prices.

As a central banker no doubt she is enthusiastic about that although Swedish workers and consumers are likely to have a different view.

The Problems

Debt and housing

The low interest rates contribute to household debt as a percentage of disposable income continuing to increase and to housing prices continuing to rise……It is therefore important that household debts do not continue to increase.

Yesterday we had new data on this front so how is that going?

The growth rate of housing loans increased by 0.3 percentage points and had an annual growth rate of 7.7 percent in July.

Thus we see that housing loans are booming which according to the Deputy Governor poses a problem if we consider this.

Their debts have increased more than their disposable incomes since the middle of the 1990s and the debt ratio is now at just over 170 per cent, which is a record-high level

Unless disposable incomes are increasing at an annual rate of 7%+ then we can say that was a record high but is no longer! Also whilst lending to business and companies is growing at a relatively paltry 3% there seems to be a boom in one familiar area.

Most of the loans to non-financial corporations comprised loans with multidwelling buildings as collateral. In July, these loans amounted to SEK 611 billion.

Indeed it may well be lending to the household sector under another name.

Loans to tenant-owner associations, which are considered non-financial corporations, amounted to SEK 377 billion.

There were quite a few questions to me about this happening in the UK under the new version of Funding for Lending so if we are copying the Swedes then perhaps it is!

What are the interest-rates?

In a ZIRP or excuse me NIRP (Negative Interest-Rates Policy) world I often get asked about mortgage and savings rates so here they are.

The average interest rate for housing loans for new agreements was 1.61 percent in July…….The average interest rate for new deposits by households in bank accounts was 0.10 percent in July,

The banks are still apparently making a nice spread aren’t they? So fears about their demise in a NIRP world were overdone and the Deputy Governor went out of her way to point out that the “precious” was doing okay.

I can also note that the four major Swedish banks made profits of almost SEK 44 billion during the first half of the year.

House Prices

These are surging and I pointed out back on the 4th of this month what was taking place here.

Magdalena Andersson, Sweden’s finance minister, called a 13 per cent rise in house prices in the year to May a “worrying development”.

The official numbers are running at more like 9%.

The solution

This is supposed to be macroprudential style policies but even the good Deputy Governor seems doubtful about them.

It is then of course essential that one also ensures that Finansinspektionen is equipped with the most efficient tools possible to be able to manage its task in a good way. And if one later discovers that there are doubts regarding some parts of the mandate,

Of course macroprudential policies have been tried and found wanting in the past which reminds me of this from one of the Star Trek films.

Kirk: “Names, Lieutenant!”
Valeris: “I do not remember.”
Spock: “A lie?”
Valeris: “A choice.”

Retail Sales

With the narrow money measure rising at an annual rate shown below and there being very little consumer inflation it is no surprise that retail sales have boomed.

The annual growth rate for the narrow monetary aggregate M1 increased in July and amounted to 15.3 percent.

Here they are in detail.

The retail trade sales volume increased by 5.9 percent in July compared with the same month last year. Retail sales for consumables decreased by 1.7 percent while retail sales for durables increased by 12.6 percent. Durable goods showed its single strongest sales month since July 2007.

As Rihanna might say “boom, boom, boom” or if we dip back in time to Shirley Bassey.

Hey big spender
Hey big spender
Hey big spender
Spend a little time with me

And if we look forwards

Retail confidence increased to 111 in August, which is considerably stronger than normal.


This version of expansionary monetary policy into a boom is pretty much unique I think and I have often wondered how much of the new central bankers text-book is being revealed to us by the Riksbank. You might think that  booming house prices and strong retail sales would lead it to rein back its efforts but if you look at the way that a lead indicator of inflation is developing they could go again.

Producer prices in total decreased 1.1 percent between June and July…..A stronger Swedish krona also contributed to the downturn.

Should that happen well there is only on song for that.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain


16 thoughts on “The Swedish economic experiment of negative interest -rates in a boom goes on

  1. Hi Shaun

    It seems that the Riksbank is doubling down on trying to get inflation up to get rid of the debt burden to which I say – good luck!

    What I find extraordinary is that CBs have now morphed into full fledged economic managers with responsibility for more or less everything. Unfortunately they will lose control at some point and then the fun will begin.

    Looking at some of these issues with the larger players I note with interest that the PBOC has been dumping US T Bonds to the tune of over $100 billion in the last few weeks. This amounts to a reverse QE and an “unplanned” exit from the QE position. It’s a timely reminder that QE purchases by the CBs are not the only, or even the main, game in town. When the CBs lose control – fairly shortly I suspect – everyone will be selling and QE may be just a drop in the ocean and powerless to prevent a rise in IRs.

    These games of manipulation have gone on far too long.

    • I will wish them as much ill-luck on that as possible.
      The thrifty should be ruined for the sake of the spendthrift, or, in Governmental terms, cowards, even if that means suppressed growth.
      We, the ordinary people, should be enjoying a handsome-level of disinflation right now, but politicians do not have the testicular fortitude to raise in taxes, what they wish to spend.

    • Hi BobJ

      The US and China seem to be engaged in a war of words right now. From Reuters.

      “On Thursday, Yao Yudong, head of the central bank’s Research Institute of Finance and Banking, told Reuters the past week’s global stock market rout was sparked by concerns over a possible interest rate rise by the U.S. Federal Reserve and not by the yuan’s devaluation.

      He urged the Fed to delay any rate hike to give fragile emerging market economies time to prepare.”

      In such an environment it would be quite possible that China would sell some US Treasuries as a warning shot. However I am always dubious about the accuracy of such numbers, remember the reports about Belgium?

  2. HI Shaun
    Keep up the the good work in this mad world.

    I think Floyd have covered yesterday’s and today’s blog.

    Money, get away
    Get a good job with more pay and you’re ok
    Money, it’s a gas
    Grab that cash with both hands and make a stash
    New car,caviar four star daydream
    Think I’ll buy me a football team!

    I note that the FSCS deposit protection is being reduced
    by 10k. What does that say about government commitment?


    • I note that the FSCS deposit protection is being reduced
      by 10k. What does that say about government commitment?
      Following the appreciation in Sterling, to kid on it’s worth anything.
      If one major British bank goes, they all go, so who pays?

    • Hi JRH

      The FSCS change is driven by the fact that the European Union common standard is 100,000 Euros and that the UK Pound £ has been rising versus the Euro. Thus 100,000 Euros buys less and the protection limit will be cut from £85k to £75k.

      Does anybody know what happens to those who have deposits say fixed-rate bonds based on the £85k limit which have a longer term than the end of this year?

      • They’re allowed to reduce their holdings by a maximum of £10000 to £75000 with no penalty. Individual banks/Building Societies can bemore generous than this (e.g. for someone who has say £100000 being allowed to withdraw £25000 to attain the £75000 limit) but I haven’t seen any yet.

  3. Hi Shaun, unfortunately the Swedes are suffering from a very bad dose of Thatcherism as are most of the CB’s. They think you can control everything purely via monetary policy.

    I suspect they are very worried about the private debt pile – but how to manage that?

    The “big idea” which has been around for over30 years now with limited success to put it euphemistically is “mess with interest rates and QE” so if we make money cheaper the consumer can still finance their debt. The CB’s reckon without the lemming like quality of most consumers the world over where they see lower interest rates so immediately borrow more and will worry about how to finance it when the bill comes in (can kicking politicians comes to mind).
    What is required now and for the last …er…30 odd years is some semblance of macro policy. We have had the beginnings of a move here with the Mortgage Market Review, which all other CB’s including the Riksbank need to copy but amend to make qualification for loans much more Draconian, then the debt pile will begin to reduce. As always, it will be a tight rope to walk as they would risk pulling too much demand out and deflating the economy.

      • Thanks for the link Bob J. It’s interesting how different people take away different things from the same report. I am reasonably encopuraged by this as I hear “59 per cent of the advice provided to customers was suitable” – so the majority of advice was suitable whilst ” “the basis for 38 per cent of recommendations was unclear” states that the advice may be right or wrong we don’t really know so we need better record keeping in terms of considerations undertaken in arriving at the advice, hardly an indictment of the process although the following is a clear indictment of 3% of cases which is a minimal error rate imo but needs to be improvesd upon – “in 3 per cent of the cases assessed, the advice was judged to be “demonstrably unsuitable.”

        I would point out that since the introduction of MMR the pace of house price increases has slowed considerably although it is still too high, suggesting further tightening of the MMR is required. I am also aware that it’s difficult to determine how much of the slowing pace of increases is due to MMR and how much due to ever increasing unaffordability in terms of prices and (lack of) wage growth. It’s sometguing that requires careful monitoring and tweaking.

        • Being of a cynical frame of mind I’m inclined to believe that some advisers find MMR somewhat irksome and try to circumvent it one way or the other. Let’s face it the Ponzi needs irresponsible not responsible lending and we must all feed the Ponzi.

        • I think most advisers find MMR irritating Bob and some will try to circumvent it which is why it needs to be backed up by legislation along the lines of courts refusing to hear default cases where loan companies failed to follow MMR.

          If this happened, monitoring would then have to be mounted on back street money lenders as the illegal debts were sold on and the police would take over with criminal prosecutions when moneylenders sent their “Account Executives” round to “persuade” the debtor to pay.

    • Hi Noo2

      The “big idea” points directly at negative interest-rates if you combine the trends that you mention. As it is still going well we know what happens next….

      I remember the UK monetary policy back then of much higher interest-rates to control the £M3 money supply measure. The problem was “disintermediation” or the money supply shifted into M4 via such changes as the demutualisation of the building societies and hence (Charles) Goodhart’s Law. It also gave us an anti-QE called overfunding which you won’t be surprised to read had its problems too. We then shifted to exchange-rate targeting under Nigel Lawson when we shadowed 3 versus the German Dm and joined the ERM. What were we thinking…?

      As for macro policy that takes us back to things which we liberalised then like the building societies. That genie is out of the bottle to some extent. The other issue is that macro policy relies on a combination of banks telling the truth and regulators….

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