When will the Riksbank of Sweden cross it’s own Rubicon?

This week is posing more than a few questions for the pattern of world monetary policy and it is only Thursday morning. It is hard not to have a wry smile at my own country where the Governor of the Bank of England Mark Carney was busy talking the UK Pound £ down yesterday as well as performing a hand brake U-Turn and I believe a hand stand only to be well,Trumped later! We will have to see how that settles down as those selling the Pound ( Morgan Stanley and Deutsche Bank) have seen their stops fired off this morning and the Financial Times twitter feeds have stopped its regular mentions of its level.

However we are going to continue on what might be called our grand tour to Europe and pop over to the Kingdom of Sweden which of course is a familiar stopping point for me. The reason for that is the extraordinary monetary experiment which is taking place there which is approaching the zone where there should be ch-ch-changes. This morning they have updated us with their monetary policy minutes so let us take a look.


Policy is summarised below.

All of the Executive Board members assessed that it was now appropriate to hold the repo rate unchanged at –0.50 per cent and to reinvest maturities and coupon payments on the government bond portfolio until further notice…….Moreover, a majority of the Executive Board members considered that the risks to the upturn in inflation call for a continuation of the government bond purchases during the first half of 2017 and that they should be extended by SEK 30 billion, corresponding to SEK 15 billion in nominal bonds and SEK 15 billion in real bonds.

Newer readers will be beginning to see my interest as we see something of a full house of negative interest-rates, QE (Quantitative Easing) government bond purchases and an Operation Twist style reinvestment of maturing bonds. In short even Paul Krugman of the New York Times can call them “sadomonetarists” although of course my avoidance of politics means I can only rarely mention him these days although I suppose I can point out his current plan to boost the US economy by buying some bathroom fixtures.

So we see that the monetary pedal is close to the metal although it would seem that the Riksbank has dropped its threat/promise to intervene in foreign exchange markets. although we do have some Forward Guidance.

Increases in the repo rate are not expected to begin until the beginning of 2018.

Care is needed though as Riksbank Forward Guidance has had all the success of Forward Guidance from the Bank of England.

Inflation is on its way

This morning Sweden Statistics has told us this.

In December 2016, the inflation rate according to the Consumer Price Index (CPI) was 1.7 percent, up from 1.4 percent in November. The CPI rose by 0.5 percent from November to December 2016.

If you are wondering why well it is not a particular surprise.

mainly due to a rise in prices for transport services (9.1 percent), which contributed 0.3 percentage points.

There were other effects of the higher price of oil (package holidays were 4.8% more expensive) and the cost of food rose. So in terms of essential goods ( food and fuel) inflation is particularly rising although of course central bankers consider these to be non-core. If you try to allow for the initial effects of the official negative interest-rate then you see this.

The inflation rate according to the CPIF (CPI with a fixed interest rate) was 1.9 percent in December, up from 1.6 percent in November.

All this matters because this is badged as the modus operandi of the Riksbank.

More precisely, the Riksbank’s objective is to keep inflation around 2 per cent per year.

No doubt you are seeing the point which is that the level of consumer inflation is plainly on its way into that zone in 2017. Also you may note a difference from the ECB (European Central Bank) which aims to keep it just below 2%. So the Riksbank has an easier target and if you like has a little “wriggle” room.

House Prices

Extraordinary monetary policy is often accompanied by a rise in asset prices of which house prices are an example so let us examine today’s data.

Real estate prices for one- or two-dwelling buildings increased by almost 1 percent in the fourth quarter 2016, compared with the third quarter. Prices increased by almost 10 percent on an annual basis during the fourth quarter of 2016, compared with the same period last year.

A driving force in this is the availability of mortgage credit which of course is one of the objectives of the Riksbank. Central bankers love to “pump it up”.

The downturn was mainly due to housing loans, with an annual growth rate of 7.8 percent in November, which was a decrease of 0.1 percentage points compared with October.

It is revealing that an annual growth rate of 7.8% is a downturn isn’t it? If you want it in monetary terms here it is.

Housing loans amounted to SEK 2 882 billion in November, which is an increase of SEK 17 billion compared with the previous month and SEK 209 billion compared with the same month last year.

Also you may note as we have observed before that you can push the cost of mortgage credit lower but it then appears to find something of a floor. After all we cannot harm the “precious” can we?

The average interest rate for housing loans for new agreements was 1.57 percent in November, which means that it dropped compared with October, when it was 1.59 percent.


There is much to consider here but first let me give you a clear example of the alternative universe which is inhabited by central bankers and their ilk.

Another positive in November was food prices continuing to rise and surprise on the upside.

The only group that should be welcoming this is farmers! Everyone else will be disappointed in the rise of a commodity so essential that it is called “non-core” by central bankers.

If we move to monetary policy then there are echoes of the situation in the Czech Republic that I analysed on Tuesday as we see another country where inflation had a strong December. Oh and I did mention the Riksbank’s poor Forward Guidance performance didn’t I?

Inflation therefore continues to surprise on the downside,

Now they are in danger of being wrong-footed as they continue with negative interest-rates and more QE designed to push inflation higher just as it approaches its target. In my opinion they are rather like Julius Caesar when he crossed the Rubicon as not only is inflation rising but economic growth looks solid.

A growth rate of 3.4 per cent is expected this year, a tenth higher than in the October forecast. Growth for 2017 has been revised upwards by 0.4 percentage points to 2.4 per cent.

Also they expect that the performance of the Krona in 2016 will further boost inflation.

The impact of the exchange rate on inflation has also been analysed. The Swedish krona has recently been unexpectedly weak.

Thus we find ourselves arriving at one of my earliest topics which was and is how central banks will reverse the extraordinary monetary policies they have implemented or more simply what is their exit strategy? So far Life’s Been Good for Sweden and the Riksbank but Joe Walsh also has a warning.

I go to parties sometimes until four
It’s hard to leave when you can’t find the door




12 thoughts on “When will the Riksbank of Sweden cross it’s own Rubicon?

  1. HI Shaun
    What happens to the CB’s when inflation
    is way above 2% by which time no one in the real
    world will be “Surprised,” As you say with no one
    having an exit strategy CB’s will watch it rise until they
    all get nose bleeds.

    London Grammar

    And so, you built a life on trust
    Though it starts, with love and lust
    And when your house.begins to rust
    Oh. its just. metal and dust.


    • Hi JRH

      It seems that the Riksbank rather lost its nerve when Paul Krugman and others were criticising it. After all with economic growth solid and according to them looking okay then the fact the inflation target will soon be exceeded should as a minimum see the end of negative interest-rates. Yet as you lyrics point out they are already quite late.

  2. Sweden is an absolute basket case. The left leaning governments have for decades encouraged mass immigration, which has largely left them with a sizeable amount of the population unable to integrate and completely unable to work. A massive welfare dependent segment, and with all the related social issues………and massive welfare bill. It’s literally a powder keg, set to go off.

  3. Great blog, Shaun, as always.
    Eurostat’s OOHPI series are not updated in the most timely way, and unlike the ONS they don’t even seem to have updated their data for 2016Q3. (Eurostat calls their owner-occupied housing (OOH) price indices based on the net acquisitions approach OOHPIs while the ONS uses the term OOH(NA)). Neverthless, it is pretty damning that Sweden showed the highest annual inflation rate of any of the 26 countries for which data is available, which include non-EU member Norway. Its annual inflation rate was 8.3% for 2016Q2, up from 7.9% from 2016Q1. The corresponding UK OOHPI inflation rate was 3.4% for 2016Q2, up from 3.0% in 2016Q1. (In 2016Q3 it was 2.1%.)
    By the way, as I said in the paper I just posted in the RPI CPI User Group library, it was wrong for the Consumer Prices Advisory Committee that saddled the UK with the CPIH to conflate the accounting approach to OOH used in the RPI and now in the RPIJ with the opportunity cost approach used in the Swedish CPI for houses. (For flats the rental equivalence approach is used.) They assign the misleading term “limited user cost approach” to both. There are three possible variants of the user cost approach: the accounting approach, the opportunity cost approach and the rental equivalence approach, and while the opportunity cost approach is equivalent to the rental equivalence approach if the rate of interest applicable to the opportunity cost of owner’s equity is defined residually, the accounting approach is always distinct from the other two.

    • Hi Andrew

      Thanks for the Swedish numbers which confirm the points I have made. It must be just as bad being a first time buyer of property there as it is in the UK. Although I have to say that I am getting more dubious about the UK data in this series.

      I will take a look at your post on Statsusernet so thanks for the heads up.

  4. Shaun, I’ve got a Swedish story for you but lets start with MC, the unreiable boyfriend. I was entertained by his claim to have created the recent economic upturn as his responded instead to the “grave consequences” of our referendum outcome.

    What I did notice this morning on the FT was an expanded reference to his speech ahere he listed new headwinds and one most interestingly to do with property. I’ve not heard this from the MSM, maybe I’m just ignorant. Is Commercial real-estate going through a down-turn? Isn’t this same downturn as existed back in 2011 when all agents closed ranks to pretend they assets were still valuable?

    Back to Sweden… well I thought I’ve had enough of the the too big to fail banks and I had heard that Handelsbanken were an excellent and independent Bank They never take Govt subsidy and have very low loan/mortgage delinquency intheir loan book, uncontaminated by other products from other banks, CDO’s, CDS swaps, MBS etc. I considered moving my current account and savings account. Handelsbanken have the highest consumer rating, for banking services and pride themselves on a personal service instead of high street bank call-centre nightmares.

    I figured if they had “rich”customers who were high net worth, good loan book and low delinquencies that they would have strong profits and the ability to share their sound model with customers in terms of nominal/neglible saving rates/returns but NO, they pay nothing on any savings accounts.

    I was not bothered by the Swedish depositi guarrantee because I view the BoE £75K guarantee to be worthless, maybe because the currecny itself is becoming worthless 😉

    Anyway the stee monthly fee and the lack of a return meant that I did not jump to the Swedish bank. It just goes to show that even a well run bank cannot steal itself to truely deliver banking value..

    • Hi Paul C

      Your section about returns from a Swedish bank account reminded me of what I read earlier from Sweden Statistics.

      “In November, the average interest rate for new bank deposits by households was 0.07 percent, which is the same as it was in October. The interest rate on accounts with fixed periods or a limited number of free withdrawals was also unchanged and amounted to 0.09 percent in November.”

      Thin pickings indeed. As to commercial property I am no expert apart from living near the building site which Nine Elms has become. I know several of the funds were frozen post the EU referendum vote and have come back on stream since.

    • Commercial property collapsed in 08/09, traded sideways from 09 thru 12 nad then began a recovery in 12 thru 15 at which stage it started sliding again and collapsed in early 16 but has since found a floor.

      Currently, it trades sideways awaiting news from the Brexit front……

  5. “Thus we find ourselves arriving at one of my earliest topics which was and is how central banks will reverse the extraordinary monetary policies they have implemented or more simply what is their exit strategy?”

    Don’t know what their exit strategy is, they probably don’t weither but it’s not complicated. It may be commenced gradually by stopping rolling over bonds as they mature, this will make for a smooth exit which will go on for 20 years, or in the case of the UK it will continue to limp along for 60 years!

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