Will central banks forever cry “To Infinity! And Beyond!”

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.

Currency Wars

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.

as per usual the SNB busy buying EUR selling CHF ahead of the ECB tomorrow

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?


18 thoughts on “Will central banks forever cry “To Infinity! And Beyond!”

  1. It has all been about exchange rates for some time now and central banks are soon going to run out of options on what they can do to influence them, at which point market forces will once again dominate currency markets. If ever there was a time that central bankers needed to sit down and agree a policy on exchange rates and interest rates, it is now. I am usually dead set against cartels but this is getting serious and a coordinated return to something like normality is needed.

    • Exchange rates is the lie. TPTB are not that stupid; they’ve seen that monetary easing and negative interest rates do not lower their currencies, so I absolutely discount that as being the motivation.
      The question is, “What is the real motivation?”
      What could these measures do OTHER than the stated aim?
      1) Reduce the number of bad loans on banks’ balance sheets.
      2) Make forbearance cheaper on the remainder.

      It’s the BANKS again!

      • Trying to prop up failed banks is throwing good money after bad.

        If they keep up this charade too long, I’d predict it will bankrupt nations and destroy currencies before it fixes these banks.

        It’s high time to stop bank subsidies and enforce the fraud laws properly. To quote Bernie Sanders “rugged individualism for the poor, corporate socialism and welfare for the very rich”

      • Yes, I don’t think CBs or TPTB are incompetent.. I think they are playing for time. GIven enough time bad loans will turn into not-so-bad loans. Though it is taking a very long time and I shudder to think what the total cost of this mess will finally amount to. I guess we will never know.

  2. Great column as usual, Shaun. With regard to the Swedish Riksbank, it is a real pity that the old CPIX (or KPIX) measure was discontinued after the December 2015 update. As you say, the CPIF measure just takes the mortgage rate changes out of the mortgage interest index, but the housing price index, which smoothes over house price changes over many years, remains. The CPIX measure, like the RPIX, excluded mortgage interest costs altogether and also excluded changes in indirect taxes and subsidies.
    Many central banks used to monitor an inflation measure including mortgage interest costs in the past, but I believe that the Riksbank and the Bank of Canada are the only ones left. The Bank of Canada monitors six different measures of core inflation. In the 2011 renewal of the inflation-control agreement between the Bank of Canada and the Department of Finance it was agreed that the CPIX measure, the only one that excludes mortgage interest costs, would be retained as the operational guide, i.e. the main measure of core inflation. However, the Bank’s statements since then have seemed to violate the spirit of that agreement, treating the CPIX measure as just one core measure among many, and not the most reliable one. From 2014Q4 forward, the CPIX measure has always shown the highest annual rate of the six core measures on a quarterly basis: it was above the 2% target at 2.2% from 2014Q4 to 2015Q3, and only slipped to 2.0% in 2015Q4. During the same period the annual inflation rate for the mortgage interest cost component has become increasingly negative, going from -0.5% to -1.2%, so it is small wonder the CPIX shows stronger underlying inflation than the rest. Rather than mentioning this pretty obvious fact, the Bank of Canada has preferred to talk about the different sensitivities of the core measures to exchange-rate passthrough and so forth. And if the CPIX measure is more sensitive to exchange pass-through than any other of the underlying inflation measures, surely one of the reasons is simply its exclusion of the mortgage interest component.

    • Hi Andrew and thank you

      This bit is no surprise when we note that the Bank of Canada made two 0.25% interest-rate cuts on 2015.

      “During the same period the annual inflation rate for the mortgage interest cost component has become increasingly negative, going from -0.5% to -1.2%, ”

      The flaw in any inflation measure that has mortgage costs is that the “cure” for low inflation or lower interest-rates reduces the inflation rate and of course vice versa. Many have forgotten that the headline UK RPI went negative for 6/7 months in 2009 for that reason. I think that was a factor in there being some panic at the Bank of England so it was no small thing.

      Looking at the Canadian CPIX there is likely to be some strength in it as higher oil and commodity prices begin to make an impact. There will of course be some offset as the Loonie rallies in response. Time for the Bank of Canada to put its thinking caps on and for us to discover whether it really targets inflation or GDP?!

      • Thank you for your reply. As a follow-up, the March update of the Canadian CPI was released today, and annual CPIX inflation remained at 2.0% for 2016Q1. (The April Monetary Policy Report of the Bank of Canada had forecast a drop to 1.9%.) As you said, conditions seem to be ripe for an increase in CPIX: the annual inflation rate went up from 1.9% in February to 2.1 in March. If one looks at an inflation rate more geared to the recent past, the annualized three-month rate of change in the seasonally adjusted CPIX was 2.5% in March as opposed to 1.9% in February and 1.6% in January. I agree with you that the Bank of Canada seems to be devaluing fighting inflation compared to other goals. We now have a seven-quarter run during which CPIX inflation has been either above or at target, which is quite unprecedented in the quarter of a century that the Bank of Canada has had an inflation targeting regime. (The previous record was five quarters from 2006Q3 to 2007Q3.) However, the Bank of Canada doesn’t see this as a matter of concern, only as an argument for no longer treating the CPIX measure as its operational guide.

  3. I thought that this was what all these G8/10/20 Conferences where about? Or is it more about a free holiday, fine dining and a few drinks?

    • Hi Foxy

      On the drinking front Jim Hacker was shown more than a few times “three parts to the wind” in Yes Prime Minister, so there is no doubt some of that! But as to actual achievement there is invariably very little with again Jim Hacker being obsessed by the pictures and column inches created.

      The latest G-20 agreed in Shanghai to this.

      “We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes.”

      Then quite a few continued the policies aiming at a lower currency…

  4. I heard an interesting and quite alarming statistic on the radio when a BMW dealer was being interviewed. Apparently 92% of all private car sales (not just BMW) are financed on a payment schedule rather than being bought outright. Add to that the overstretched mortgage market and we have a situation where the financial elastic is at snapping point. Which must make politicians terrified to raise interest rates in case they collapse the economy. Why they then make things worse by lowering rates even further is beyond me. Desperation?

    • Be ready with your cash and wait for the crash. I was at the car auction about 2009 & saw a BMW530D, 1 owner 3/4 years old, clean go for 8 grand. It was 40 grand new.

  5. A rather disturbing statistic on the radio yesterday during an interview with a BMW sales manager. Apparently 92% of all private care sales are financed by monthly payment options rather than outright purchase. add to this the overstretched mortgage market and you can see why politicians are terrified about raising rates. They have painted themselves into a corner. Why do they make it worse by lowering rates!!

  6. Pingback: Anglo American pay revolt as 41% oppose remuneration report – as it happened – News-Trust

  7. For some reason the above comment didn’t load first time so I typed it again and now you unfortunately have it twice!

    • Hi Pavlaki

      Never mind I was wondering earlier why I had to approve it! Some form of Ghost In The Machine. As to your car finance point a friend of mine bought a Fiesta about a year ago and it was £500 cheaper to take the finance and then pay it off. Madness!

      The UK SMMT told us this about the record number of car registrations in 2015.

      “Buyers took advantage of attractive finance deals and low inflation to secure some of the most innovative, high tech and fuel efficient vehicles ever produced. “

  8. Thinking about the similarities between asset-backed securities & toxic mortgage backed securities – I’m wondering whether to buy land or wait for price reductions. Or to phrase it another way – will cash be king or will the notes be less valuable than toilet paper ?

    With the amount of horse manure spoken by central bankers -> scepticism of the currencies managed by these people is warranted.

    • Hi ExpatInBG

      I agree entirely but the issue is timing. What I mean by that is we have learned that when central banks but things now they often hold to maturity. Thus it might be quite some time before the actual truth emerges. After all the recovery is supposed to have been going in the US for a while and yet US $1.76 trillion of mortgage backed securities are still on the Fed’s books…

  9. One thing about ECB antics Shaun – the EZ grew by 0.6% in the first quarter despite a strengthening Euro. I think this is more to do with M1 growth than Mario’s posturings about €85 billion per month QE on sovereign bond purchases and now €20 billion per month on corporate bond purchases on € denominated bonds . His posturing is allowing me and other investors to clean up on € denominated sovereign and corporate debt though and then there’s the double whammy of the steadily appreciating €……..

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