Some days pieces of news just leap off the screen at you and this morning has seen a strong example of that. One event has encapsulated many of the themes of this website already so let us crack on as I temporarily hand you over to the Riksbank of Sweden.
Riksbank to purchase government bonds for a further SEK (Swedish Kronor) 45 billion and repo rate held unchanged at -0.50 per cent.
This is a bit like one of those Russian dolls so let us open them up one by one. Firstly for newer readers the Riksbank has been operating in an icy Nordic world of negative interest-rates for over a year now and its deposit rate is the lowest of all at -1.25%. It was relatively late to the policy of QE (Quantitative Easing ) starting it in February last year but has since expanded and expanded the effort from the original 10 billion Kronor toe in the water. Indeed there is a new front being opened today.
The purchases cover both nominal and real government bonds, corresponding to SEK 30 and SEK 15 billion, respectively.
I like the idea of inflation linked bonds being called “real” and the others? There is an additional risk here if you think about it as an exchange between the treasury and an “independent” central bank. Or if they are one and the same well what are they playing at? I will answer that later. But we are left with the thought that the Riksbank may have been running out of conventional or nominal bonds to buy.
As to the pace of purchases context is not easy. As you can see it is much faster than the plan from this time last year but also represents a slowing on the first half of 2016 so take your pick.
The Swedish economy
Students of economics are no doubt taught these days by those living in Ivory Towers that monetary easing is a response to economic difficulties so let us check that out.
Sweden’s GDP increased 1.3 percent in the fourth quarter of 2015, seasonally adjusted and compared to the third quarter of 2015. GDP increased 4.5 percent, working-day adjusted and compared to the fourth quarter of 2014.
Even the most casual observer will have to admit that this is an odd and indeed bizarre type of economic difficulty as the Swedish economy looks both turbo and super-charged. As to fears of the economy slowing, well the Riksbank raised its economic growth forecast for 2016 this morning to 3.7%. Now I do not know about you but there was a time when economic growth of 8% in only two years would have a central bank applying the brakes and raising interest-rates.
The excuse is low inflation and in particular it being below the 2%. Readers of this website will be aware that I think the trend has changed illustrated by the new theme for the price of crude oil. Some of this was evident in the latest Swedish inflation numbers.
The inflation rate was 0.8 percent in March, up from 0.4 percent in February. The Swedish Consumer Price Index (CPI) increased by 0.5 percent from February to March 2016.
Indeed if you exclude mortgage rates which have been driven lower by the Riksbank then the picture changes again.
The inflation rate according to CPIF was 1.5 percent in March 2016. CPIF increased by 0.5 percent from February to March 2016.
For those of you wondering where all the money has gone well you do not have to look too far for it.
(House)Prices increased by almost 12 percent on an annual basis during the first quarter 2016, compared to the same period last year.
So the list of casualties in the QE wars has both first time buyers and those looking to trade up the property market in Sweden on it.
Oh and the list of winners starts with asset owners again a feature regularly denied by central bankers.
Meanwhile GDP per head may not be all you think it might be. From Sweden Statistics.
In the next few years the population in Sweden is expected to increase by about 1.5 percent per year.
Todays policy action is explicitly described as such by the Riksbank.
With continued expansionary monetary policy abroad, there is a risk that the krona will appreciate earlier and faster than in the forecast…..The continued asset purchases will reduce the risk of the krona appreciating faster than in the forecast and of a break in the upturn in inflation.
Oh and just in case this does not work.
The Riksbank is also prepared to intervene on the foreign exchange market if the krona appreciates so quickly as to threaten the upturn in inflation.
Some of you may be wondering how did that work out for the Swiss National Bank ( and indeed the Bank of Japan)? Well according to market observers it opened fire itself last night.
The link and indeed casual factor here is the Euro. You may note that something which is regularly badged by supporters as an example of stability is clearly not for the surrounding nations. Some of this is caused by the monetary policy response to the lack of economic stability and growth within the Euro area to which other nations respond. Only a couple of weeks ago even Hungary joined the negative interest-rates club albeit only -0.05%. Mind you it always starts like that.
Of course another part of the Nordic region will be closely following events as the Nationalbanken which is presumably meeting right now in Copenhagen Denmark mulls how to respond to all of this. When you are pegged to the Euro you have no choice at all. After all with it expecting economic growth of 1.3% in 2016 it is in danger of being a “lenny lightweight” when it meets the Riksbank at international meetings.
An Inconvenient Truth
All this effort to weaken a currency and yet? Well Twitter does have its uses and takes up the story.
Robert Bergqvist Riksbank delivers more QE (SEK+45bn) but SEK is strengthening!
Katie Martin: Riksbank boosts QE to cool the krona. Krona jumps.
So the Riksbank joins the Swiss National Bank, ECB and Bank of Japan is seeing that monetary easing leads to a stronger rather than a weaker currency. Also the half-life of the initial easing response has shortened dramatically to a few second now if that.
Oh and this sums it up although we are left wishing that his parents had called him Rick.
European Central Bank
The Euro and the monetary policy of the ECB are the main drivers of the events above. Muse sing about a “supermassive black hole” and the Euro has been like that for the interest-rates and currencies of its neighbours. Today Mario Draghi is on deck and we are left wondering whether he has been subject to some early morning economic policy trolling from the Riksbank!
Personally I think that the Riksbank was catching up from the last ECB move and whilst mice do upset elephants I am only expecting some minor policy changes if at all today. Along the lines of a definition change or two around for example the “assets” of Italian banks and similar.
By the time you read this many of you will know the ECB decision and if it sticks to rhetoric and Open Mouth Operations it will be mimicking the Bank of Japan.
BoJ Officials Are Said To Share Rising Concern About Yen’s Gain… (@livesquawk)
But we see that negative interest-rates and QE are a clear example of junkie culture where the central banking addict needs ever higher doses with ever more side-effects or unintended consequences. For a while now the main game has been trying to devalue or depreciate your currency which can also be called exporting deflation. Of course it is not going well as we see exactly the reverse often happening. Time for some Outkast.
I’m sorry Ms. Jackson (oh)
I am for real
Never meant to make your daughter cry
I apologize a trillion times.
In these inflated times a trillion seems a bit undercooked but as to how long this will last the duo do have an opinion.
Forever, forever, ever, forever, ever?