Today features one of the earliest themes of this blog. It can be summarised around the line never get yourself into something without a plan to get out of it. Back in my early days on this website I suggested that when the time came to roll back the interest-rate cuts and Quantitative Easing ( QE) that central banks would dither and delay and thereby act too late. We now know that in generic terms what was happening then wasn’t the half of it as more and more QE was to follow around the world as well as more interest-rate cuts taking some negative. So the problem became ever larger as central banks had more skin in the game and would be even more afraid of any setbacks should they withdraw policy stimulus.
Also there was another feature likely to lead to a delay. You see by the 18th of January 2011 I was pointing out this.
Even worse than this if we go back to the Bank of England’s forecasts for 2010 we can see that they underestimated inflation in 2010 by a considerable amount. This continues the Bank of England’s forecasting record which is now so poor in this area it is abject.
The nuance that has developed over time is that central banks seem to be most woeful at forecasting the most important factor at the time. For example the Bank of England has more recently kept getting wage growth wrong and the ECB raised the issue of 5 year inflation swaps and then led itself down the garden path. Whilst there will be official denials this fact of course is likely to add to the existing penchant to dilly and dally on any policy tightening.
This morning has seen this announcement from the Riksbank.
Given this, the Executive Board of the Riksbank has decided to hold the repo rate unchanged at -0.50 per cent and does not expect to raise it until the middle of 2018. Purchases of government bonds will continue during the second half of 2017, as decided in April. At the end of the year, the purchases of government bonds will thus amount to a total of SEK 290 billion, excluding reinvestments.
So it remains very expansionary and here is the apparent justification.
Economic activity is strong and inflation is close to the target of 2 per cent.
Even odder is the enthusiasm for making Swedes better off by making them poorer.
Monetary policy needs to remain expansionary for inflation to continue to be close to 2 per cent……..However, it has taken time and a great deal of support from monetary policy to bring up inflation and inflation expectations
As you can see the view here is that without the policy of the Riksbank the economy of Sweden would somehow disappear off a cliff. But its problem is highlighted in its report.
The Swedish economy is strong. The upturn in inflation has continued and been faster than expected. In July, inflation was 2.4 per cent in CPIF terms, and 2.1 per cent in terms of the CPIF excluding energy prices. GDP growth was unexpectedly high in the second quarter. Monthly indicators point to the strong developments continuing through the second half of the year. Although the inflation outcome for July is primarily explained mainly by temporarily higher prices for foreign travel, the underlying development appears stronger than expected. Inflation is therefore expected to be somewhat higher during the remainder of the year than was forecast in July.
There is something familiar in their inability to forecast either GDP or inflation as we note inflation is above target! Now perhaps they did forecast Del Potro stunning Roger Federer this morning in the US Open tennis but in terms of the day job this continues the poor record of the Riksbank. This matters when you are undertaking what is an extreme monetary policy experiment as for example first-time buyers are unlikely to see this as a triumph.
The rate of increase of housing prices has gradually risen throughout 2017. In July, housing prices rose by an annual rate of 9 .6 per cent. Surveys show that the general public and estate agents continue to expect rising housing prices in the period ahead.
Apologies for the formatting issue but there is a clear problem for Sweden via this issue. There are other issues as we look into the detail of corporate borrowing.
has increased in significance in recent years for real estate companies in particular ( they are talking about securities issuance here)
and personal borrowing.
. Lending to households in the form of pure consumer loans without collateral has increased at an ever‐higher pace and, in July, the annual rate of growth amounted to 8 per cent.
Oh and the suggestion that interest-rates could rise next year is an example of Swedish recycling of the Forward Guidance of Mark Carney as this from September last year proves.
Not until the second half of 2017 does the Executive Board consider it appropriate to begin slowly increasing the repo rate.
By the time you read this you may already know the policy announcement from Mario Draghi but the Riksbank has undertaken a form of trolling.
This could happen if, for example, the Riksbank’s monetary policy deviates too far from that of other countries.
They mean the Euro of course and this morning’s announcement implies they expect little from the ECB today.
Yesterday’s announcement from the Bank of Canada may have provoked a stream of letters signed Mark of Threadneedle Street mentioning destruction of legacy and questioning whether they understand the true purpose of Forward Guidance.
The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
The rationale really rather reminds us of the situation in Sweden.
Given the stronger-than-expected economic performance, Governing Council judges that today’s removal of some of the considerable monetary policy stimulus in place is warranted.
Of course if we look at house price developments in parts of Canada ( Toronto and Vancouver) there is another similarity and you could argue that the response is far too late as well as being too small.
There is a fair bit to consider here. As I pointed out earlier the monetary expansionism moved on in both scale and concept ( including corporate bonds in several places and even equities in Japan). It also moved on in time as depending on how you count it we are approaching a decade of this. Thus makes me have a wry smile when central bankers use the buzzword “normalisation” when what must seem normal to millennials for example is where we are now!
But if we stay with the normalisation theme then 1% or so in Canada and the US does not take us far does it? The real issue is shown by economic growth in Sweden and indeed today from the Euro area which has been shown to have been stronger than first thought.
But in both places we still have negative interest-rates and ongoing QE bond buying programmes leaving us mulling the words of Coldplay.
Oh, no, I see
A spider web, it’s tangled up with me,
And I lost my head,
The thought of all the stupid things I’d said,
Me on CoreTV Finance