The Riksbank is probing The Outer Limits of monetary policy

There are many countries that would chew their arm off for the sort of economic growth numbers that have been produced by Sweden at the end of 2014 so today’s update from Sweden Statistics is good news. Let us get straight to it.

Sweden’s GDP increased 1.3 percent in the fourth quarter of 2015, seasonally adjusted and compared to the third quarter of 2015.

That is quite a blast forwards and comes on a day where the GDP growth for Portugal is expected to be of that magnitude for a whole year. So high is it that we should perhaps remind ourselves that the numbers are not annualised in the way that America produces its GDP data. Actually it could have maybe been even faster!

Changes in inventories decreased the GDP growth by 0.3 percentage points.

Although of course the counterpoint to that is to consider that maybe such a growth rate could only be achieved by running down inventories. There was good news also from investment and overseas trade.

Gross fixed capital formation increased by 2.0 percent. Exports increased by 2.9 percent and imports increased by 2.0 percent.

At this point we have the economic growth of most economists fantasies and let me add some more details which further put us in fantasy land.

Employment measured as the total number of hours worked increased by 0.2 percent seasonally adjusted and the number of persons employed increased by 0.7 percent.

Thus we see that the such was driven by higher employment and that if we use the hours worked measure there was quite an implied surge in productivity. We can add to this some strong annual growth figures too.

GDP increased 4.5 percent, working-day adjusted and compared to the fourth quarter of 2014.

If you think that this is towards the outer limits of what can be achieved then let us consider this from Erica Blomgren of SEB from last week.

Swe manufacturing sentiment at all time high not supported by oth indicators, implies GDP growth 6-8%

At this point we are all singing along with Frank Sinatra.

Fly me to the moon
Let me play among the stars
Let me see what spring is like on
Jupiter and Mars

Swedish Monetary Policy

After looking at the economic growth figure above this from the Riksbank of Sweden on the 11th of this month reminds us of today’s outer limits theme.

To provide support for inflation so that it rises and stabilises around 2 per cent in 2017, the Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.15 percentage points to −0.50 per cent.

So the economy is running fast and we will push it faster? Okay so they must be playing the famous introduction to the Outer Limits television series.

There is nothing wrong with your television set. Do not attempt to adjust the picture. We are controlling transmission. If we wish to make it louder, we will bring up the volume. If we wish to make it softer, we will tune it to a whisper. We can reduce the focus to a soft blur, or sharpen it to crystal clarity. We will control the horizontal. We will control the vertical. For the next hour, sit quietly and we will control all that you see and hear. You are about to experience the awe and mystery which reaches from the inner mind to… The Outer Limits.

Unfortunately for them and their yogic master Paul Krugman already things are not going as the centrally planned forecast told us as economic growth was supposed to be 0.9%. So outperformance require even more interest-rate cuts? If you want you can make something of a case for interest-rates being the icy-est of all in Sweden as the Riksbank has a deposit rate of -1.25%.

Also let us not forget that the Riksbank has been going “More…..More” in the style of Agent Smith in other directions too. One effort is via Open Mouth Operations.

The Executive Board therefore still has a high level of preparedness to make monetary policy even more expansionary, even between the ordinary monetary policy meetings.

There is also QE via sovereign bond purchases.

Purchases of government bonds will continue for the first six months of this year, in accordance with the plan adopted in October. The Executive Board has also decided to reinvest maturities and coupons from the government bond portfolio until further notice.

You may be thinking they have missed out foreign exchange intervention. Don’t be silly!

On 4 January, the Executive Board took a delegation decision enabling immediate intervention on the foreign exchange market as a complementary monetary policy measure.


At this point the ordinary person might be thinking that the Riksbank has got things right as we see economic growth surging and employment rising. But there are catches with “miracle” economic cures and they mostly come from the leads and lags of monetary policy. Things invariably look great until the do not! At which point it is way to late. Hence the reason why this monetary policy quip from William McChesney Martin became famous.

“to take away the punch bowl just as the party gets going,”

In the modern era we usually get the first sign from asset prices. Obviously bond prices are a signal in Sweden as they follow not only international trends but have the Riksbank chomping away on them like Pac-men. But let us move on to the classic signal which is the housing market.

House Prices

The Riksbank is desperately trying to get its retaliation in first,

The Riksbank has highlighted the risks associated with the low interest rate level on many occasions.

Yes it is so worried about the consequences it keeps doing it! If all else fails one can use a very long word to describe it.


Or perhaps tell everyone that (verbally at least) you had been on the case all along.

Such a development could ultimately be very costly for the national economy.

Well as I pointed out earlier this month it is already very costly for first time buyers in Sweden.

Real estate prices for one- or two-dwelling buildings increased by 3 percent during the last three-month period November 2015 – January 2016, compared to the previous period August – October 2015. Prices increased by 12 percent on an annual basis during the last three-month period November – January 2016, compared to the same period last year.

Another way of looking at this is to investigate the monetary numbers released late last week.

The growth rate for the broad monetary aggregate M3 increased from 7.6 percent (revised) in December to 9.9 percent in January.

So well above even adding economic growth to the low inflation numbers we have quite an excess. What is driving it?

Most of the increase can be explained by housing loans, which increased by SEK 209 billion and amounted to 2 708 billion in January. Housing loans had an annual growth rate of 8.4 percent in January,

Oh and it is not just individuals.

Most of the loans to non-financial corporations comprised loans with multidwelling buildings as collateral.

If we return to the booming investment numbers in the latest GDP numbers we are left wondering if that is housing punting, excuse me investment is what is really being recorded. What could go wrong?


If we step back we see that the policy of the Riksbank has gone from Alice’s Wonderland to The HitchHikers Guide to the Galaxy on its way to The Outer Limits. The fear for the Swedes is that it will end up taking Frank Sinatra off the loudspeakers and replacing it will Ella Fitzgerald.

These foolish things
Remind me of you

Meanwhile other central bankers will be noting this and markets are already responding.

9year yields turn negative. Hits fresh life-time low at -0.012% ( H/T @Schuldensuehner)

In other words they are expecting even more from Mario Draghi and the ECB next month and this has been reinforced by the Reserve Ratio reduction from the People’s Bank of China this morning. For the UK we know that Mark Carney is a dedicated follower of fashion and will Forward Guidance Mark 15 involve negative interest-rates too? If so there may well be a posse forming up of those who remortgage on the back of his previous versions of Forward Guidance.

What has he been smoking?

There are many candidates for such an award but this from Ambrose Evans- Pitchard may need yet another long walk ( weeks ) in the Andes of Chile.

This is huge. Nobody has more credibility than Mervyn King. If Otmar Issing joins him, walls will come crashing down


16 thoughts on “The Riksbank is probing The Outer Limits of monetary policy

  1. Great blog as usual, Shaun.
    I noticed that Statistics Sweden has dropped its CPIX (or KPIX) measure with its January 2016 update. In December 2015 it showed an annual inflation rate of 0.5%, up from 0.6% in November 2015, i.e. much higher than the 0.1% annual inflation rate recorded by the official CPI, which is the target inflation indicator of the Riksbank. The CPIX measure excluded mortgage interest costs and changes in indirect taxes and subsidies. Now it is gone the closes equivalent measure calculated by Statistics Sweden is the CPIF-CT measure, which includes the mortgage interest component but with a fixed interest rate, and also excludes changes in indirect taxes and subsidies. It went from 0.7% in December to 1.3% in January. I don’t carry a torch for the old KPIX measure, but it certainly appeared to be better than the alternatives. The ideal measure of underlying inflation would start from a Swedish HICP augmented by the owner-occupied housing component based on net acquisitions that Statistics Sweden should have calculated and made available to Eurostat in December 2014. Since Statistics Sweden, unlike their UK counterpart the ONS, has never bothered to publish their index, this doesn’t look likely to happen soon. Unfortunately it means that as the Riksbank continues to goose the Swedish economy with its easy money policies, it is essentially flying blind, without any good indicator of underlying inflation.

    • Hi Andrew

      Thank you for the compliment and the data. It is interesting to see the CPIF-CT measure trying to do the right thing but at far too low a level. Also there is a clear error in using a fixed interest-rate when you are plunging into the world of negative interest-rates. I fear that the change in the inflation infrastructure is the same as in the UK which is to hide the main area of inflation as much as possible. Look at the new stakeholder committees in the UK which were filled with candidates of which Sir Humphrey Appleby would approve.

      As to the Riksbank view of inflation it looks forwards and wants us to believe this.

      “inflation is expected to be lower during 2016 than previously forecast. The period of low inflation will therefore be longer. This increases the risk of weakening confidence in the inflation target and of inflation not rising towards the target as expected.”

      Perhaps they think that the crude oil price can go negative too.

  2. Nobody has more credibility than Mervyn King, and Nobody isnt here to comment

    Jason and the Argonauts – who did this to you ? – Nobody did it !

    one does have to chuckle

    then weep as these clowns are in charge – and no one notices !


    • Hi Forbin

      This also poses a question for the media. The Daily Telegraph used to be called the Torygraph but overall retained a name as a quality broadsheet paper. In recent times its reputation has been slip sliding away. Ambrose is perhaps its shining star but that quote above is reminiscent of when he told everyone Spain was fine just before the bust which to my mind led to his rather long walking holiday in Chile. The best one can say about it is that it was click bait which with his position poses its own questions.

  3. Shaun

    is it not important to comment on why we believe the RIKSBanke are doing this?

    I assume it has a lot to do with managing/manipulating their exchange rate with the Euro?
    What are Sweden’s reasons for this? is there a major upside to offset against the potential downsides of a credit/debt driven boom/bust cycle?

    Are they desperate to keep their currency weak to support exports to the euro zone? is there something more fundamental?

    I am asking from a position of ignorance rather than rhetorical querying as I genuinely don’t have a clue here.

    We all know how this ends. Its happened exactly this way with QE in the UK. Hot cheap credit chases assets. Stock market booms, property booms, lending converges on real estate loans as Business demand for finance dries up.
    Cost of living spikes
    Wages become un-competitive
    International competitiveness is compromised
    Inward investment dries up
    Exports fade
    Country carries major trade and current account deficit
    Fiscal policy deteriorates and governments begin to run large deficits
    etc etc etc.

    • Hi Anand

      Yes I agree about the fact that policy is being set via the exchange-rate and in particular the one to the Euro. In scope it almost takes us back to the era of fixed exchange rates and the consequences of that even though the Kroner has moved. They want both a lower exchange-rate and ultra low as in negative interest-rates which is the sort of thing that usually ends in the type of bust that you describe.

  4. Shaun
    I apologise for this “reply” as it is off topic, but with the EU referendum coming up I am reading different figures for our contribution to the EU.
    Are you willing to publish a post detailing the figures?

    I would suggest that it is broken down into
    1) Gross contribution
    2) Net – after the rebate
    3) Cost of EU projects in the UK (e.g. Agriculture, Universities, deprived areas etc.).
    Thus giving a final net figure.

    It would also be valuable to see the change in the figures over a number of years; to see if there is a trend.
    And finally are there any increases in the pipeline if we stay in the EU. (one possibility that springs to mind is the bank transaction tax) – I do realise that predictions are difficult particularly if they are about the future!

    I know that you try to steer clear of politics and you may feel that this is too close to the bone. But, I believe that the very fact that you stick to economics, would enhance the credibility of your figures.


      • Shaun

        Some people also claim that as a WTO member countries cannot impose tariffs upon us over 3%, I’ve been to the WTO website and cannot find any such statements so is there any truth to claims that if we left and agreed our own trade agreements we would only be subject to an upper cap of 3% on any tariffs?


  5. By coincidence, I was talking to a Swede this weekend, a successful businessman, and he cannot understand what the central bank is up to either. He outlook for the Swedish economy is not good.
    For one thing house prices are almost out of control and there seems to be no limit to mortgage availability. Swedes, apparently, can borrow for normally 40 – 50 years at a current rate of interest of about 0.75% and for the first 10 years only interest is payable. Interest payments can be offset against tax! What could possibly go wrong?

    • at a look at us for what could go wrong

      down that rabbit hole they go ….

      and when it all goes wrong – its Cilla Black time

      “surprise , surprise ! ”

      and no matter what Cassandra says , she is cursed never to be believed …..

      Well that’s me and you Shaun , might as well pull up the arm chair and get more popcorn in ….


      • Hi Forbin. Is it coincidence that since you started to regularly comment here popcorn has enjoyed a huge renaissance? I counted no less than 10 different flavours at the supermarket this morning. I expect arm chair sales are increasing too, but I can’t find the stats!

  6. Hi Shaun,
    My dad always wondered how they knew there was nothing wrong with our television set. Ah, the days of the temperamental vertical hold.
    Today I wonder how CBs know there’s nothing wrong with 21st century monetary policy, because it sure looks as reliable as a 1963 television to me.

    • Hi Eric

      if we stick to our genetic tree then I have a story about televisions and my paternal grandfather. He was a specialist engineer in the area and worked on much hi-tech (for then) equipment. At home however he ran everything off one plug socket! Now there was much less to plug in back then but even so…..Sometimes the TV would break down when he would call in Radio Rentals ( for younger readers life back then was similar to what you face of things often being rented rather than owned) and the repairmen would fix it by plugging it in. There came a stage where when my grandmother rang the shop to report a complaint the replay excluding expletives was “is it plugged in?!”

  7. Interest rates in Britain have become detached from the economy; their purpose is to make sure that as few bank loans, for whatever purpose, however risky, don’t go bad.
    In such circumstances, the usual indicators are useless.
    Does it look similar in Sweden.

    On the GDP front, any time we have an extra bank holiday in a quarter, for whatever reason, it has been used, ad nauseum, to mitigate disappointing results.
    Today, Feb 29th, means that 1st Quarter 2016 GDP should rise by 1.1% at least.
    Reckon we’ll hear about that?

    • Hi therrawbuzzin

      I was thinking I had missed the chance to wish people a good leap day where some were hopeful and others perhaps nervous. But you are right to wonder about the economic impact. Seasonal adjustment will probably miss it but calendar day adjustment should catch it.

      Today there were some extraordinary revisions in Greece ( Q4 GDP from -0.6% to 0.1%) so the subject is live.

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