The Riksbank of Sweden meets today and announces its policy decision tomorrow morning. It is facing a period where its policy if out of kilter with pretty much everything. Long gone are the days when its policy members were called “sadomonetarists” by Paul Krugman of the New York Times. These days it is in the van of those expanding monetary policy as you can see from its last policy announcement.
The Executive Board has decided to hold the repo rate unchanged at −0.50 per cent and to extend the purchases of nominal government bonds by SEK 7.5 billion and the purchases of real government bonds by SEK 7.5 billion. At the end of 2017, the purchases will thus amount to a total of SEK 290 billion, excluding reinvestments. Until further notice, maturities and coupon payments will also be reinvested in the government bond portfolio.
It is using negative interest-rates and QE ( Quantitative Easing) which is putting the pedal close to the metal but is also what can be called pro cyclical as it is expanding into an expansion.
Swedish economic activity is good and is expected to strengthen further over the next few years
Actually if you take any notice of Forward Guidance they even upped their efforts.
The first repo-rate increase is now expected to be made in the middle of 2018. The repo rate path also reflects the fact that there is still a greater probability of the rate being cut than of it being raised in the near term.
They justified this on the grounds that they expected inflation to take longer to reach its target. This shows us a facet of central bank behaviour these days. If the economy slows they use it as an excuse to ease policy but if it is doing well they are then prone to switching to the inflation rate if it is below target in an example of cherry-picking.
What do they think now?
The mid-June business survey from the Riksbank could not be much more bullish.
The strong economic situation will continue in the months ahead……Export companies are encountering ever-stronger demand from abroad. Europe stands out in particular.
Oh and as a warning for an issue we will look at in a bit there was this.
Demand has been strong in the construction and property sectors in recent years and the development of housing construction in particular continues to be very strong.
Today’s manufacturing PMI from Swedbank looks strong as well.
Sweden Jun Manufacturing PMI 62.4 Vs. 58.8 In May
The conventional view is that all the monetary easing should have sent it lower but in fact it has not done an enormous amount in recent times. If we look back to June 2014 the KIX effective exchange-rate averaged 106.7 and last month it averaged 114.4. So a bit weaker ( confusingly higher is weaker on this index) but this must have been a disappointment to the Riksbank especially as it has strengthened since late 2016. As we have noted before 2017 has been a year where many exchange-rates seem to have simply ignored any flow effect from ongoing QE programs.
One conclusion is that the backwash of moves in the US Dollar and the Euro swamp most of Sweden’s apparent currency independence. Especially if we note that a fair bit of the monetary easing is simply keeping up with the Euro area Joneses.
It was hardly a surprise after reading the above that the June Financial Stability Report rather majored on this.
Households’ high and rising indebtedness form a serious threat to financial and macroeconomic stability……….Household indebtedness and housing prices are still rising, and indebtedness is also expected to rise in the period ahead. This entails major risks for the Swedish economy.
What will they do?
Further measures need to be introduced to increase the resilience of the household sector and reduce risks.
So they will raise interest-rates? Oh hang on.
Both measures to achieve a better balance between supply and demand on the housing market and tax reforms to reduce the willingness or ability of households to take on debt are required. Further macroprudential policy measures also need to be taken.
It is interesting these days how central bankers so often end up telling central bankers what to do! Also it is notable that the rise of macroprudential policies ignores they fact that such policies were abandoned in the past because they were more trouble than they were worth.
All this came with an ominous kicker.
The vulnerabilities in the Swedish banking system are linked to its size, concentration and interlinkage, as well as the banks’ large percentage of wholesale funding and their substantial exposures to the housing sector.
A decade into the credit crunch we note that the rhetoric of reform and progress so often faces a reality of “vulnerabilities” and these get worse as we peer deeper.
Liquidity risks arise partly as a result of Sweden having a large, cross-border banking sector with significant commitments in foreign currency.
If you take the two quotes together then you have the feeling that the TARDIS of Dr.Who has transported you back to 2006. Still we know that the interest and concentration of the Riksbank will be on this issue now as the “precious” may have troubles. Oh and they have a sense of humour too.
It is essential that the banks insure themselves
In reality the Swedish taxpayer is likely to find they have got the gig and this is very different to the usual Riksbank rhetoric on foreign-exchange intervention although if you think about it the result they want would be rather likely to say the least!
At the same time, it is necessary that the Riksbank has a sufficiently large foreign currency reserve if liquidity requirements should arise in foreign currency that the banks themselves are unable to manage.
At the end of last month and after the Report Sweden Statistics updated us further on the state of play.
In May, households’ housing loans amounted to SEK 2 977 billion. This is an increase of SEK 18 billion compared with the previous month and SEK 195 billion compared with the corresponding month last year. Housing loans thus had an annual growth rate of 7.1 percent in May,
Some ( obviously not central bankers ) might think that low mortgage rates are a major driver of this.
The average interest rate for housing loans for new agreements was 1.57 percent in May.
The Real Estate Price Index was up by 2% in the first quarter of 2017 making it some 8% higher than a year before. Last year’s UBS Bubble index told us that Stockholm was leading the way.
The sharpest increase in the UBS Global Real Estate
Bubble Index in Europe over the last four quarters
was measured in Stockholm, followed by Munich,
London and Amsterdam
The Riksbank has in its own mind invented a new type of monetary theory where you expand policy into a boom. It so far has ignored the dangers of higher household debt and booming house prices. Being a first-time buyer in Stockholm looks as grim as being one in London. As to the announcement I am not expecting much change after Friday’s wages data showed a slowing. These days wage growth is the crucial number as we looked at last week.
Total average hourly wages for manual workers in April 2017 were SEK 165.80 excluding overtime pay and SEK 168.20 including overtime pay. These numbers reflects an increase increase of 1.7 percent and 1.8 percent compared
to April 2016. The average monthly salary for non-manual workers in April 2017 excluding variable supplements was SEK 38 420 while it was SEK 39 390 including variable supplements. These numbers reflects an increase of 1.5
percent and 1.7 percent compared to April 2016.
Bank of England
I see its staff have voted to strike as Mark Carney’s increasingly troubled reign as Governor continues. My advice to the staff is to keep away from the subject of performance related pay.