Sweden is a curious mixture of monetary expansionism and fiscal contraction

This morning has brought us a new adventure in the world of central bank Forward Guidance.

The Executive Board has therefore decided to hold the repo rate unchanged at −0.50 per cent. If the economy develops as expected, there will soon be scope to slowly reduce the support from monetary policy. The forecast for the repo rate indicates that it will also be held unchanged at the monetary policy meeting in October and then raised by 0.25 percentage points either in December or February.

You may already have realised that this is from the Riksbank of Sweden and that there is something awfully familiar about this as Martin Enlund highlights below.

There are a multitude of issues here. Let us start with the fact that the Riksbank was ahead of the game in offering Forward Guidance before the concept was formally devised. I guess that sits well with being the world’s oldest central bank. But the catch so typical of the way that Forward Guidance has developed is that it has proven spectacularly wrong! Indeed I cannot think of any central bank that has such a malfunctioning crystal ball. Ever since 2012 an interest-rate rise and indeed succession of rises has been just around the corner on a road that has been so straight even the Roman Empire would be proud of it.

One of the features of Forward Guidance is that it is supposed to allow businesses and households to plan with certainty. The reality here is that they have been consistently pointed in the wrong direction. Indeed their promises of interest-rate rises morphed into interest-rate cuts in the period from 2012 to 2016. Such that their forecasts if we try to average them, suggested the repo rate now would be of the order of 3-4%, rather than the actual -0.5%. If we look at the period when the repo rate has been negative they have consistently suggested it is temporary but it has been permanent so far, or if you prefer has been temporary as defined in my financial lexicon for these times.I think that there are two major possibilities here. The first is that they are collectively incapable of seeing beyond the end of their noses. The other is that it has been a deliberate policy to maintain negative interest-rates whilst promising to end them.

A more subtle suggestion might be that this is all for the foreign exchanges who do take a least some notice rather than the average Swede. After all if he or she did take notice of the Forward Guidance they have probably long since given up.

The Krona

We get the picture here from this from Bloomberg.

Sweden’s elections this weekend could spell more pain for an already floundering currency.

As ever I will skip past the politics and look at the currency. One cannot do so without first noting the role of the Euro here which is like a big brother or sister to its neighbouring nations. When it cut interest-rates it put pressure on them to cut as well. So let us look at the Krona versus the Euro.

What we see is a clear pattern. Essentially the monetary easing of the Riksbank has taken the Krona from 8.4 versus the Euro in the late summer of 2012 to 10.57 as I type this. So a gentle depreciation to add to the negative interest-rates in terms of monetary policy as we rack up the stimulus count.

We can take that wider by looking at the trade-weighted or Kix Index. If we do so we get a similar result as the 102 of late summer 2012 has been replaced by 121 now. Just for clarity this index operates in the reverse direction to the usual method as a higher number indicates a weaker currency.

If we switch to inflation prospects then some should be coming through as the Wall Street Journal reported yesterday.

Down 10% against the dollar, the krona has fallen more than any other developed-market currency. Among the 10 most heavily traded currencies in the world, it has undershot even China’s Yuan—itself under pressure from the trade conflict with the U.S.—and the U.K.’s Brexit-bruised pound.

So commodity prices will have risen in Krona terms from this effect.


This has been another feature of the expansionary toolkit of the Riksbank

At the end of August, the Riksbank’s government bond
holdings amounted to just over SEK 330 billion, expressed as a  nominal amount .Net purchases of government
bonds will be concluded at the turn of the year, but principal  payments and coupon payments will be reinvested in the government bond portfolio until further notice.

So what has become regarded as a pretty regular QE programme which politicians love as it reduces borrowing costs for them. One generic point I would note is that these Operation Twist style reinvestments are only happening because QE has proven rather permanent rather than the extraordinary and temporary originally claimed. So far only the US Federal Reserve is attempting any unwind. Many argue this does not matter, but when you have redistributed both wealth and income towards the already wealthy I think that it does.

Money Supply

This has been an issue across more than a few countries recently, as we have been observing slow downs. This is also true of Sweden because if we look at the narrow measure or M1 we see that an annual rate of growth of 10.5% in July 2017 was replaced with 6.3% this July. If we look back we see that a major player in this has been the QE purchases because when the Riksbank charged into the bond market in 2015 the annual rate of growth in M1 went over 15% in the latter part of that year. Now we see as QE slows down so has M1 growth.

A similar but less volatile pattern can be seen from the broad money measure M3. That was growing at an annual rate of 8.3% in July 2015 as opposed to the 5.1% of this July. So we see clearly looking at these why the Riksbank has just balked on a promise to raise interest-rates at today’s meeting. Taken in isolation that is sensible and in fact much more sensible than the Bank of England for example which has just raised Bank Rate into monetary weakness.

House Prices

I would like to present this in a new way. We have a conventional opening as according to Sweden Statistics house prices fell by 1.2% in 2012 ( they measure one or two dwelling buildings) which explains the about turn in monetary policy seen then. But if we switch to narrow money growth we see that it looks like there is a link. It peaked in 2015 as did house price growth (10.8%). It remained strong in 2016 and 17 as did house price growth ( 8.4% and 8.3% respectively). Okay so with money supply growth fading what has happened to house prices more recently?

In the last three-month period, from June to August 2018, prices rose by almost 1 percent on an annual basis compared with the same period last year.

Boom to bust? As ever we need to be careful about exact links as for example the latest couple of months have been stronger. But what if monetary growth continues to slow?


Readers will be pleased to discover that the Riksbank has investigated its own policies and given itself a clean bill of health.

The Riksbank’s overall assessment is that the side‐effects
of a negative policy rate and government bond purchases
have so far been manageable.

Where there is a clear question is a policy involving negative interest-rates, QE and a currency depreciation when the economy is doing this.

Activity in the Swedish economy remains high. GDP growth in the second quarter was surprisingly rapid and together with strong indicators, this suggests that economic activity is still not slowing down.

Inflation is also on target. So why is policy so expansionary? Perhaps Fleetwood Mac are correct.

I never change
I never will
I’m so afraid the way I feel

Should they reverse course and find the economy and house prices heading south thoughts will be a lot harsher than the “Oh Well” of Fleetwood Mac.

Oddly we find that fiscal policy is operating in the opposite direction as this from the Swedish Debt Office shows.

For the twelve-month period up to the end of July 2018, central government payments resulted in a surplus of SEK 109.6 billion. Central government debt amounted to SEK 1,196 billion at the end of July. This corresponds to 2.3 and 25.3 percent, respectively, of GDP.

We are in a rare situation where they could genuinely argue they have a plan to pay it all off. The catch comes with the fact that with a ten-year bond yield of 0.54% and a low national debt they have no real need to. So a joined up policy would involve ending negative interest-rates and some fiscal expansionism wouldn’t it?




14 thoughts on “Sweden is a curious mixture of monetary expansionism and fiscal contraction

  1. Not surprisingly, the long term chart of the EUR/SEK look similar in shape to EUR/GBP, but if one is to look at the strength of the Euro vs both currencies since January 1999 when it was introduced, sterlings weakness is exposed, to date the Euro is up 20.5% vs the Krona and 30.5% vs sterling.

    Considering the policies of both central banks regarding forward guidance( and doing the exact opposite),QE, promoting an out of control housing bubble, interest rates set too low for too long(and negative for Sweden despite a booming economy) it shouldn’t be any surprise should it?

    The only surprise is why two central banks should be pursuing such similarly destructive and insane policies for so long.

    • Inflation in Sweden is at 2.1%, I hardly think their economy is out of control. And where is this housing bubble? Swedish house prices are falling.

      • Since 2005 house prices are up 130%. A bubble?


        The Fed(Greenspan) refused to acknowledge the dotcom bubble at the time as well.
        The Irish and Spanish governments also refused to acknowledge their housing bubbles, and I would say most people in the UK are in denial of our housing bubble, the problem being, most speculative bubbles have historically been very short lived, usually striaght up and straight down, the above bubbles are different because they have been created by central banks keeping interest rates too low for too long(nearly twenty years now) and then when the market tried to correct the overvaluations and misallocation of capital, they then again intervened and not only stopped prices correcting but created a further bubble with zero interest rates and other measures.
        The fact these bubbles have gone on so long does not detract from the fact that they are bubbles, but merely shows the extent and duration of central bank interventions.

      • Good Challenge however like the UK, falling prices in London and Reading today serve to mask 15 years of unsustainable year on year increases. Similarly in Sweden theyve had their rises and now the CBs are in a quandary. They trashed the vital signs of normality and we now have a Frankenstein outcome.

        • Since you admit house prices were rising well before QE started I doubt that QE is what is responsible for their rise. Most probably the increase in house prices is the flip side of lower inflation, which drives down long term interest rates and so reduces the cost of buying a house. The central banks did a great job in reducing inflation since the 1970’s thanks to Friedmans insight that actually they were the ones responsible for inflation by excessive monetary expansion. Now the CBs are fighting that same battle but the problem is now too little monetary expansion. The monetary base (NGDP) has been expanding very slowly since the GFC. You are correct that if the CBs hiked up interest rates at this present time, house prices would fall, but that would be because we would be entering a great depression not because of any return to normal prices. I don’t think a great depression with millions out of work is a price worth paying for cheaper houses.

          • “Since you admit house prices were rising well before QE started I doubt that QE is what is responsible for their rise”
            QE is acknowledged to have driven up house prices by artificially lowering bond yields and hence interest rates and added further fuel to the fire.

            “Most probably the increase in house prices is the flip side of lower inflation, which drives down long term interest rates and so reduces the cost of buying a house.”
            Oh this lower inflation in necessities that central banks seem to keep undercounting like food and electricity and gas?, yes people have got so much disposable income from lower prices they decided to go on a multi decade property buying binge,this despite real wages falling 5% between 2007 and 2015, so how did house prices manage to keep going up? It wouldn’t have been anything to do with the Bank of England keeping rates at emergency levels since then and refusing to raise them despite the Federal Reserve increasing rates SEVEN TIMES in that period and also the Funding For lending Scheme would it?


            “The central banks did a great job in reducing inflation since the 1970’s thanks to Friedmans insight that actually they were the ones responsible for inflation by excessive monetary expansion”.
            So house price inflation doesn’t count then? If they did such a good job of controlling inflation why have property prices exploded since then? The house I’m currently typing this in has gone up in price ten fold in the last thirty years. Would you not consider this a monetary expansion – the expansion of mortgage credits?You also seem to have selectively forgotten the high inflation period of the mid 70s to early 80s when it was running at mid teens% for almost a decade.

            “Now the CBs are fighting that same battle but the problem is now too little monetary expansion. The monetary base (NGDP) has been expanding very slowly since the GFC.”
            Wouldn’t be anything to do with the average consumer being maxed out on his credit card and overborrowed on his mortgage and car loan would it?Resulting in weak monentary growth due to weak loan growth would it?

            And yes I do think a great depression would be a price worth paying to rebalance our economy, as it might teach people a valuable lesson about spending and borrowing responsibly so that this nightmare scenario of the banks generating boom after boom to compensate for the subsequent busts never happens again.

            Perhaps you might try reading more of Shaun’s blogs before posting on here, or do you prefer getting your economic news and theories from the BBC?

          • “And yes I do think a great depression would be a price worth paying to rebalance our economy” – you can’t be serious surely? Wanting millions of people thrown into despair and poverty just to prove a point? That’s one of the most evil things I have read on the internet.

  2. Hello Shaun,

    Sweden’s monetary policy seems a little odd given the other wise healthy state of its economy.
    They have followed the US , EU and Japan ( and UK ) for what appears to be all pain for no gain?

    So maybe something else then , or are their TBTF Banks so tied in with the rest of Europe they dare not rock the collective boat ?


    PS: Norway I can understand, their sovereign funds would take a massive hit on a EU bank collapse.

    • Hi Forbin

      To some extent the Riksbank is caught in a trap or rather two traps. The first is that it got rattled when called “sado monetarists” by Paul Krugman and reversed course. But they did so with so much enthusiasm that now they are afraid of what would happen if they raised interest-rates.

      Next they have been trapped by being so close to the Euro and the ECB is showing no signs of raising interest-rates and Mario seems to be planning to depart next year without raising. So a raise would presumably see the Krona rally and the Riksbank is also afraid of “hot money” flows.

      The catch is that the longer you leave it the more difficult it gets.

  3. Great blog as usual, Shaun.
    The announcement that the Riksbank would keep its repo rate unchanged comes the day after the Bank of Canada announced it would keep its overnight rate unchanged. Coming one right after the other it shows the extent to which the Bank of Canada now marches strictly to its own drummer in terms of monetary policy, ignoring the practice of other central banks.
    The Swedish Riksbank targets now targets not the CPI, but the CPIF, i.e. the Swedish CPI with the mortgage rate held constant. There is no similar index published by StatCan but there is a CPI excluding mortgage interest cost, very similar to the RPIX series the Bank of England used to target. Finance Minister Morneau and Governor Poloz could have and should have switched the inflation target indicator from the CPI to the CPI excluding mortgage interest cost when the inflation-control agreement was renewed in 2016. The mortgage interest cost index inflation rate moved up from 4.5% in June to 5.2% in July, largely, if not exclusively due to the rising mortgage interest rates, brought on by the BoC’s own interest rate hikes. The interest rate announcement makes no mention of this at all, instead, choosing to focus on a 16.4% hike in air fares for July In taking the CPI inflation rate from 2.5% in June to 3.0% in July. The CPI excluding mortgage interest cost inflation rate went from 2.4% in June to 2.9% in July.
    The only other central bank in the world, as far as I know, that still has a target inflation indicator influenced by mortgage rate changes is the Central Bank of Iceland, whose CPI takes an opportunity cost approach to measuring owner-occupied housing (OOH). This too could shortly change, as one of the proposals from the June report of the task force on monetary policy reform was that the target inflation indicator switch to the CPI excluding OOH.
    (Kristin Forbes contributed to the work of this task force, although not, it would seem, to this particular proposal.) It’s certainly not the best choice for a target inflation indicator, but the task force proposal would at least keep mortgage rate changes out of it.

    • Hi Andrew

      You highlight what is the basic problem with using mortgage interest-rates in inflation measures. If you raise interest-rates to control inflationary pressure you also raise the measure as mortgage rates respond. Oddly in the debate on the RPI that part of it (~2.4%) rarely comes up at least partly I think because people got used to the measure without it ( RPIX) and have to some extent forgotten it is there in the full RPI.

      As to Canada the major foreign exchange force is the US Dollar and the impact is doubled up by it being the reserve currency for commodities. Yet I note Deputy Governor Wilkins has pretty much swerved that issue in her speech today. She has managed some humour.

      “We have some finely honed economic models to guide us,”

      Also I note that the inflation upswing you mention is you guessed it described as temporary.

      “That said, inflation data for July surprised us on the upside by coming in at 3 per cent. We had expected that inflation would average around 2 ½ per cent in the third and fourth quarters, rising toward the upper end of our target range because of temporary factors such as gasoline prices, rather than pressure from excess demand.6 Since much of the July surprise was due to a jump in the airfare component of the consumer price index (CPI), we continue to hold this view.”

      Also it is okay because core inflation is lower.

      “Here is where our measures of core inflation are particularly valuable as operational guides, because they strip out a lot of the noise. Those measures have remained around 2 per cent, supporting our assessment that the inflation increase will be temporary.”

      However I do note if we return from core measures to ones actually paid that real wages have slipped into the negative zone.

      ” Our preferred measure of wage gains was up by just under 2 ½ per cent in the second quarter.”

      Yet like so many she seems to cling to output gap theory.

      “Yet, wages were rising less quickly than we would expect in an economy that is near capacity.”

      • I never fail to be amazed at your thoroughness, Shaun. I wasn’t aware of the Senior Deputy Governor’s speech myself, so thank you for referencing it. Wilkins is on thin ground in pointing to the new core inflation measures as being particularly adept in eliminating noise from the hike in the air transportation inflation rate from 13.2% in June to 28.2% in July. None of the three measures that now define the operational guide specifically exclude air transportation, or anything else, for that matter, beyond changes in indirect taxes. The CPI-common measure certainly does have some weighting on air transportation and is influenced by the change. By contrast, intercity transportation, which includes air transportation, is one of the eight highly volatile components excluded from CPIX, the BOC’s previous operational guide. Her speech made no reference to the dramatic hike in the inflation rate for electricity in Ontario, from -10.9% to 0.3%, due entirely to a July 2017 price reduction, the last in a series under the so-called Ontario Fair Hydro Plan, falling out of the index. Since the CPIX does not exclude electricity along with other energy costs, its inflation rate went from 1.3% in June to 1.6% in July, much greater than the increase in any of the three new measures going forward. It was a telling omission. From 2017 forward, the Ontario Fair Hydro Plan made the CPIX a downward-biased measure of underlying inflation. I entertained myself calculating a CPIX excluding electricity because of this. Now it is arguably a more reliable measure than any of the three measures in the new operational guide since it is the only one that excludes mortgage interest cost. CPI-common, in particular, is bad in this respect, as it is quite heavily weighted towards mortgage interest.

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