Today is an example of what the military call a target rich environment so let me open with the words of advice from The Hitchhikers Guide to the Galaxy.
An organisation which seems to have abandoned such sense over the past year or so has been the Riksbank of Sweden. It was only yesterday that in my article on the spread of negative interest-rates the comments section suggested there would be a further cut today. Apparently they did not want to disappoint us.
To provide support for inflation so that it rises and stabilises around 2 per cent in 2017, the Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.15 percentage points to −0.50 per cent.
There is much to consider here with the initial reports also coming with a tinge of reporting that the Swedish version of “More,More,More” was also being played. There is much to consider in an international context but let me open by discussing the consequences and problems which Sweden faces domestically. The first is a central bank that moved interest-rates in increments of 0.15%! How was that decided? So 0.1% silly but 0.15% is effective? You see back in 2008 the repo rate got as high as 4.75% so we see that if 5.1% of interest-rate reductions are not working you are as Britop in the film Snatch put it “on very thin ice my pedigree chums” arguing that another 0.15% will fix it.
The Swedish economy is doing rather well
Before we get to this bit let us dip into our textbook for the day.
A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.
You see the Riksbank is cutting because the economy of Sweden is going rather well!
Growth in the Swedish economy is high and unemployment is falling, which suggests that inflation will rise in the period ahead.
In fact like the song New York, New York it is so good they told us twice.
The Riksbank’s very expansionary monetary policy has helped to strengthen the economy and reduce unemployment, and has contributed to an upward trend in underlying inflation since the beginning of 2014.
Last February I pointed out the incongruity of economic growth of 2.7% and an official interest-rate of -0.1%. Well this February I can point out that the divergence has got worse as economic growth forecast to be 3.5% this year and 2.8% next is now accompanied by a repo rate of -0.5%.
This is all justified on the grounds of inflation being below its 2% target. At the moment it is 0.1% which of course will be welcomed by Sweden’s consumers and workers as they find that their wages and income go further in real terms. If we look at the private-sector then manual wages are rising at 1.8% and non-manual at 2.5% so the Swedish economy is being boosted by the consequences of the oil price fall as real wags rise.
Now we have a problem or in fact two problems. You see most people think that central banks operate to reduce inflation whereas here the Riksbank is doing exactly the opposite of this in boosting it. This happened when central banks magically produced a 2% inflation target out of a box without any better justification than it seemed okay. The justification that it allows relative price changes is made to look a fraud by the large oil price moves which are exactly that. So not only is the central bank raising inflation it is announcing an expansionary policy which has some and maybe a lot of deflation in it. What could go wrong?
If we step back a bit we see that Sweden is in effect seeing its monetary policy being set by the supermassive black hole that is the Euro and that the real rationale here is to try to weaken the Krona. Initially it fell by 1% but I shall return to a problem highlighted here later as we mull that everybody cannot devalue.
Speaking of things which could go wrong let me help out with one which already is. From Sweden Statistics this morning.
Real estate prices for one- or two-dwelling buildings increased by 3 percent during the last three-month period November 2015 – January 2016, compared to the previous period August – October 2015.
As West Ham won this week let me help out with their theme song.
I’m forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.
If we look a little further back we see this.
Prices increased by 12 percent on an annual basis during the last three-month period November – January 2016, compared to the same period last year.
So real wages are up by around 2% and house prices are up by 12%. I await all the reports which if the UK is any guide will tell us how “affordable” all this is.
But never fear you see in the same way that the Bank of England is “vigilant” on the subject so is the Riksbank.
The Riksbank has highlighted the risks associated with the low interest rate level on many occasions.
However its message is rather like the bit in each Mario Draghi speech about reform in the Euro area.
It is also important that Finansinspektionen’s mandate for macroprudential policy is clarified.
Let me give you a clue, it is there in every meeting minute.
Anyway if things are under control this bit seems to be undertaking some form of guerilla warfare.
If no measures are taken, this, in combination with the low interest rate level, will further increase the risks. Such a development could ultimately be very costly for the national economy.
Back on July 2nd 2015 I gave my views on this.
Also I think that first-time buyers in Sweden will already be singing along to its most famous pop music export Abba.
S. O. S.
The international scene
Yesterday’s speech by and interview of Janet Yellen already seems from another world as the response was for the Japanese Yen to surge. It blasted through quite a few levels yesterday and overnight and is still through the 112 level versus the US Dollar as I type this. So we see a problem for the Riksbank which is that in rather short order the Yen has strengthened after an interest-rate cut into negative territory. Ooops!
Next we have bond yields and longer term interest-rates and again Janet Yellen seems to be rather like a Queen Canute. The US ten-year note yields 1.67% as opposed to the circa 2.2% when she raised interest-rates. Meanwhile even Forward Guidance 12.0 as well as all the previous versions of Mark Carney is in absolute disarray.
UK government borrowing costs lowest since Siege of Yorktown, 1781 (@minefornothing)
That refers to a ten-year Gilt yield of 1.32% which makes me think as I type it. But if we continue with the Carney debacle or as it has become called “Carnage” then the five-year yield has fallen to 0.71% and it is a benchmark for fixed-rate mortgages. Should it stay there Mark Carney should hang his head in shame whenever he meets anyone who remortgaged on the back of his Forward Guidance.
Meanwhile in the supermassive black hole which is the Euro area then the ten-year yield of Germany is 0.18% whilst that of Portugal is 4.2%. Plenty of work for the ECB hedge fund traders to do there.
It was only yesterday that I analysed the spread of negative interest-rates and I suggest readers remind themselves of that and also my past articles on Sweden. But for now let me note that helicopter money as a strategy is being mentioned in some quarters and our guidebook for the day tells us about that.
Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich.
Meanwhile the Bank of Japan is on the case of the soaring Yen.