The Swedish Riksbank is facing the consequences of its own policy

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 Kronor

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.

Household Debt

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.

House Prices

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.






18 thoughts on “The Swedish Riksbank is facing the consequences of its own policy

  1. Shaun, once again I find myself puzzled about why the central banks act as they do. These people are not daft ( do I hear howls of derision? ) and have forgotten more about monetary policy and economics in general, than I will ever know. I can understand the race to the bottom in currency exchange rates, however,I have this feeling that there is much more going on beneath the surface and I cant see what it is. Were the banks in a bigger mess in 2007 than we were ever told and they need these rates to function? Do central bankers now judge that even a small increase in rates will collapse the economy? They must have understood where their ultra low interest rates would lead to, and the risks involved, and still they went ahead and now possibly are unable to redact their policy. There must be much more to this than I understand ( cynicism aside ) to justify their actions. Any thoughts?

    • Pavlaki, you are right to question the under-currrents. We have entered the quickening, a feedback loop driven by simple mathematics. Even a small rise in IR’s can directly unravel the past 10 years of missteps. Shaun I still think you should call an autumn face to face event for us to present papers on the likely outcome of these policies, by October there wiĺl more people who want to hear….

    • Good thoughts, Pavlaki.
      If the CBs were a public company, employees might be granted performance options, based on, say share price gains. Could CBers be granted options / bonus’ on FTSE / DAX / CAC / OMX levels etc? Only thing I can think of that explains the outcome. Not that bankers would play with other peoples money to enrich themselves of course ….

      Oh dear.

      The theory just fell down. The BoE want to strike?

    • Iceland shows that the 99% do not suffer unduly when you treat banks as normal businesses, allowing the insolvent to fail and prosecuting those bankers who acted fraudulently.

      Other than central banker self interest, why do the banks need protection ?

      • A Central Bank’s primary function is to protect the banks in it’s country – thats why they are protected, not because they need to be protected but because protection of the banks is the Central Bank’s job description, simple as that, I presume that job description was originally postulated based on the premise that a financial system cannot function.without banks

    • Pavlaki, yes it is very confusing as to why central bankers do the things which conflict with their own policies and are in total disregard for the countries in which they operate. They are all usually run by academics who have no real experience of life outside of academia or the real world or even business.
      It might pay you to look at who is behind those academics, who really decides what happens and use those academics as mere puppets, try researching the foundation of the Federal Reserve.
      Ask yourself why the Fed is raising rates into a very weak economy, the exact same thing they did in 1929 when they withdrew liquidity, and for which Bernanke subsequently apologised and said it wouldn’t happen again(after Greenspan did it again during the dotcom bubble bursting).

  2. Shaun, thanks for highlighting that expansionary policy, whilst “looking through” an asset boom. It does ring some more local bells too, thinking about how Mark C. likes to avoid looking at balancing indicators.

    So this could set the ” gold standard” for dealing with the effects of the GFC, just pump it up ….forever.

    Paul C.

    • Hi Paul C

      I remember someone at Societe Generale back in the day that the Nikkei 225 could make 60,000 but with the implication that it would not buy much. In a way that theme is playing out as asset prices soar although of course consumer inflation measures mostly ignore it.

      As for Mark Carney he assured us earlier of this from his role at the FSB.

      “#G20 reforms have made banks safer & addressed shadow banking risks ”

      I hope you feel suitably reassured….

  3. Shaun. Can you tell us what effective tools central banks have remaining in their tool-boxes and whether, in your opinion, there are central banks which are still in the driving seat?

  4. Every time you change country as the subject of your blog, I am optimistic that somewhere, someone must be doing things differently. But no, even growing Scandinavian countries are applying the same recipe.
    I am pretty convinced that, when the plates stop spinning, the scale of the nightmare will be revealed and there will be many an economics textbook written in fifty years’ time about the incredible crash caused by QE/ZIRP and there will be wailing and a gnashing of teeth. Most of all, people will say “It must never happen again (Until the next time, of course)”.

    • “Every time you change country as the subject of your blog, I am optimistic that somewhere, someone must be doing things differently. But no, even growing Scandinavian countries are applying the same recipe.”

      There is one country doing things differently James, the US Fed is raising rates into a strong (for these days) economy and has at least started talking about winding down it’s QE.

      • Sorry – pressed down instead of up due to fat fingers!
        Thanks for the reminder – I wonder whether any other country has the scale and bravery to do it.

  5. Great blog as always, Shaun.
    You write: “the rise of macroprudential policies ignores the fact that such policies were abandoned in the past because they were more trouble than they were worth.” Could you expand on that please? That would make an interesting blog or couple of blogs in itself.
    On July 1, PM Trudeau gave a speech that left Alberta out of a list of Canadian provinces and territories.That made me feel guilty that I hadn’t mentioned in my comment on your Friday blog that Alberta too is also planning to raise its minimum wage to CAN$15(₤8.90) and will get there ahead of Ontario, on October 1, 2018, as opposed to January 1, 2019, for Ontario. Alberta started raising the minimum wage on October 1, 2016, when it went from $11.20 to $12.20. Alberta also eliminated a special minimum wage rate of $10.70 for liquor servers, so they received a 14% increase in their hourly wage rate. The lower rate for liquor servers was supposed to adjust for their earnings from tips. Anyway, this makes the point more strongly that provincial minimum wage hikes are likely to cushion any tendency to lower real wages in Canada over the next couple of years.

    • Hi Andrew and thank you

      That’s an interesting idea. If I do the online equivalent of thinking out loud that mostly covers the UK in the 70s with changes such as Competition and Credit Control and later the end of exchange rate controls. In a way prices and incomes policies come in there as well as they had a similar philosophy and success rates.

      It surprises me that different regions set their own minimum wages. I can maybe understand it in the US with the state structure but even so it seems a policy for a national structure to me. Oh and I like the phrase “liquor-server” so much better than bar(wo)man.

      • The incomes policies of the 70’s failed because they were so loosely written you sail 100 Maersk triple E container ships through them!!

        If legislation were tightly written Macro would work. You seem to be championing monetary policy yet it has been proven over and over again even to the last decade to be a dismal failure usually taking the form of a sledgehammer to crack a peanut.

  6. I’m glad everyone above is as puzzled as I am by CB actions, there seems to be no rhyme or reason to them. America, as the reserve currency, can make things up as they go along I suppose but other banks really that bad? I suspect the answer is yes, insolvent after all these years.

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