Today quite a few themes of mine have been in evidence already and I would like to take you back to last Friday. I wrote a post about Euro area monetary policy with this title.
Mario Draghi “It’s no use going back to yesterday, because I was a different person then.”
Please mark that thought as there is an institution of which the Lewis Carroll quote is even more applicable to as they were previously labelled as sado-monetary masochists. In the same article I pointed out this.
Good job I put the worlds oldest central bank the Riksbank of Sweden at the front of the list! Today is an anniversary for it as this time last year it cut interest-rates to 0% so ZIRP in a literal sense but here is the crux of the matter this was on the basis of a very positive -especially for these times- economic forecast.
GDP is expected to grow at a rate of 1.9 per cent this year and 2.7 per cent next year. During 2016 and 2017, GDP will grow by 3.3 and 2.3 per cent respectively.
Okay so if you accelerate into a boom what could go wrong? Well I was on the case.
Household indebtedness is high in both a historical and international perspective……..which is reflected in rapidly rising housing prices.
The justification was low inflation but I pointed out this as a counterpoint.
However even the most fanatical of central bankers do not believe in interest-rate cuts having an immediate effect with the leads and lags for a full effect being in the period 18/24 months ahead.
So it could impact at exactly the wrong moment and in fact as the Riksbank has been about as successful as forecasting the future as the Bank of England that was in fact likely. Having set the scene here is the first issue do they care?
What happened next?
In a nutshell they decided to sing along to Elvis Costello and the Attractions.
Pump it up until you can feel it.
Pump it up when you don’t really need it.
Sweden found itself with an interest-rate of -0.35% as the Riksbank plunged deeper into the icy cold world of negative interest-rates and it also started an aggressive QE (Quantitative Easing) program. This posed its own question as a year ago I pointed out that the Swedish ten-year bond yield was 1.22% so what was going to be gained by pushing it even lower? The evidence from elsewhere was that such moves had achieved little as otherwise Japan would not have had two lost decades. The Riksbank ignored such reality and in fact continued to add to its original program.
At first there was a sigh of relief that there was not another interest-rate cut but there was a development that central bankers consider to be important. We got some Forward Guidance and the emphasis is mine.
The repo rate is left unchanged at −0.35 per cent but an initial raise in the rate will be deferred by approximately six months compared with the previous assessment.
Here we see another theme of these times as policy tightening seems to be always just around the corner until we get there when it is just around the next corner and repeat. It is particularly interesting that the Riksbank has said that on the day of the US Federal Reserve announcement as it is quite a plain judgement if you think about it.
Also there is the issue of the fact that just like QE negative interest-rates seem to be going “on and on and on” to coin a phrase. Of course we need to take some care as the history is still relatively short but the danger sung about by Coldplay is at yellow alert.
Oh, no, I see
A spider web, and it’s me in the middle,
So I twist and turn,
Here am I in my little bubble,
Indeed in an echo of the hints of Mario Draghi of the ECB we were told this today.
The repo rate can be cut further, which is reflected in the repo rate path
-0.45%, -0.5%? Oh and before I move on does anybody really believe that 0.1% interest-rate moves have any beneficial impact? After all if they did we would not be where we are.
Extraordinary monetary measures
The Executive Board has therefore decided to extend the government bond purchasing programme by an additional SEK 65 billion so that purchases will amount to SEK 200 billion in total by the end of June 2016.
So all it took was one hint from the ECB and the Swedes decided to act first? We get a clear extra theme here as this is plainly a currency issue as we mull the way that the Euro affects its neighbouring currencies. Five years after the original currency wars statement they appear to be raging still in spite of the fact that it is a zero sum game.
There is another significant matter too as Sweden is on its way to the number one spot. From Erica Blomgren at SEB.
Riksbank will buy ~40%. But considering that free float is much lower, the amount is substantial.
Of course we expect more now from the ECB and the Bank of Japan is chomping through the JGB (Japanese Government Bond) market like it is playing Pac Man but for now the Swedes lead. Conceptually QE has followed this from the Matrix Reloaded.
Agent Smith: The best thing about being me… There are so many “me”s.
We also got something of an echo of the Funding for Lending Scheme of the Bank of England.
Moreover, the Riksbank is prepared to launch a programme of lending to companies via the banks.
The details are vague right now presumably because the Bank of England experience has been one of failure or as it prefers to put it counterfactual success.
Also it would not be the Riksbank if they did not echo Agent Smith and his cry of “More!”
The Riksbank still has a high level of preparedness to quickly make monetary policy even more expansionary if the inflation prospects deteriorate, even between the ordinary monetary policy meetings.
What about the housing market?
There is only one implication for asset prices here which is summarised for us by Yazz.
The only way is up, baby
For you and me now
The only way is up, baby
For you and me
Actually as of the latest numbers they were motoring anyway.
Real estate prices for one- or two-dwelling buildings increased by 4 percent during the third quarter 2015 compared with the second quarter 2015. Prices increased by 10 percent on an annual basis
indeed only yesterday we learnt that the mortgage market was singing along to Lets Go Crazy by Prince.
The annual growth rate of housing loans increased by 0.2 percentage points compared with August and amounted to 8.0 percent in September…..
Oh and is this the sort of business lending that the Riksbank wants to boost?
Most of the loans to non-financial corporations comprised loans with multidwelling buildings as collateral.
There is so much to consider here. In a way the situation surrounding the Euro area is a bit like the Domino Theory applied to South-East Asia in the 1970s. Who will fall next? if we look at the currency issue we see that the Riksbank has responded very quickly to the way that the Euro was pushed lower by Mario Draghi on Thursday. That went well for about an hour then the Krona rose, so whilst it is of course very early days it would appear that 65 billion Krona does not buy much these days.
As to interest-rates both the ECB and the Riksbank seem set to plunge further into the icy cold waters of negative interest-rates. Again we see that the “lower bound”seems to be getting well lower! Also the feature looks ever more permanent. No wonder that “dedicated follower of fashion” Mark Carney seems to getting ever colder feet about his promised interest-rate rise. Moving onto QE we see that it is a bit like the never ending story.
Life as a first time house buyer in Sweden is going to get grimmer and grimmer. But let me leave you with another thought. Exactly the same issues will be being discussed in the boardrooms of the Swiss National Bank and Denmark’s Nationalbanken.
“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.”
This from Martin Enlund is rather eloquent on the subject.
Some have compared it to Donald Trump’s hair.