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?




When will the Riksbank of Sweden cross it’s own Rubicon?

This week is posing more than a few questions for the pattern of world monetary policy and it is only Thursday morning. It is hard not to have a wry smile at my own country where the Governor of the Bank of England Mark Carney was busy talking the UK Pound ÂŁ down yesterday as well as performing a hand brake U-Turn and I believe a hand stand only to be well,Trumped later! We will have to see how that settles down as those selling the Pound ( Morgan Stanley and Deutsche Bank) have seen their stops fired off this morning and the Financial Times twitter feeds have stopped its regular mentions of its level.

However we are going to continue on what might be called our grand tour to Europe and pop over to the Kingdom of Sweden which of course is a familiar stopping point for me. The reason for that is the extraordinary monetary experiment which is taking place there which is approaching the zone where there should be ch-ch-changes. This morning they have updated us with their monetary policy minutes so let us take a look.


Policy is summarised below.

All of the Executive Board members assessed that it was now appropriate to hold the repo rate unchanged at –0.50 per cent and to reinvest maturities and coupon payments on the government bond portfolio until further notice…….Moreover, a majority of the Executive Board members considered that the risks to the upturn in inflation call for a continuation of the government bond purchases during the first half of 2017 and that they should be extended by SEK 30 billion, corresponding to SEK 15 billion in nominal bonds and SEK 15 billion in real bonds.

Newer readers will be beginning to see my interest as we see something of a full house of negative interest-rates, QE (Quantitative Easing) government bond purchases and an Operation Twist style reinvestment of maturing bonds. In short even Paul Krugman of the New York Times can call them “sadomonetarists” although of course my avoidance of politics means I can only rarely mention him these days although I suppose I can point out his current plan to boost the US economy by buying some bathroom fixtures.

So we see that the monetary pedal is close to the metal although it would seem that the Riksbank has dropped its threat/promise to intervene in foreign exchange markets. although we do have some Forward Guidance.

Increases in the repo rate are not expected to begin until the beginning of 2018.

Care is needed though as Riksbank Forward Guidance has had all the success of Forward Guidance from the Bank of England.

Inflation is on its way

This morning Sweden Statistics has told us this.

In December 2016, the inflation rate according to the Consumer Price Index (CPI) was 1.7 percent, up from 1.4 percent in November. The CPI rose by 0.5 percent from November to December 2016.

If you are wondering why well it is not a particular surprise.

mainly due to a rise in prices for transport services (9.1 percent), which contributed 0.3 percentage points.

There were other effects of the higher price of oil (package holidays were 4.8% more expensive) and the cost of food rose. So in terms of essential goods ( food and fuel) inflation is particularly rising although of course central bankers consider these to be non-core. If you try to allow for the initial effects of the official negative interest-rate then you see this.

The inflation rate according to the CPIF (CPI with a fixed interest rate) was 1.9 percent in December, up from 1.6 percent in November.

All this matters because this is badged as the modus operandi of the Riksbank.

More precisely, the Riksbank’s objective is to keep inflation around 2 per cent per year.

No doubt you are seeing the point which is that the level of consumer inflation is plainly on its way into that zone in 2017. Also you may note a difference from the ECB (European Central Bank) which aims to keep it just below 2%. So the Riksbank has an easier target and if you like has a little “wriggle” room.

House Prices

Extraordinary monetary policy is often accompanied by a rise in asset prices of which house prices are an example so let us examine today’s data.

Real estate prices for one- or two-dwelling buildings increased by almost 1 percent in the fourth quarter 2016, compared with the third quarter. Prices increased by almost 10 percent on an annual basis during the fourth quarter of 2016, compared with the same period last year.

A driving force in this is the availability of mortgage credit which of course is one of the objectives of the Riksbank. Central bankers love to “pump it up”.

The downturn was mainly due to housing loans, with an annual growth rate of 7.8 percent in November, which was a decrease of 0.1 percentage points compared with October.

It is revealing that an annual growth rate of 7.8% is a downturn isn’t it? If you want it in monetary terms here it is.

Housing loans amounted to SEK 2 882 billion in November, which is an increase of SEK 17 billion compared with the previous month and SEK 209 billion compared with the same month last year.

Also you may note as we have observed before that you can push the cost of mortgage credit lower but it then appears to find something of a floor. After all we cannot harm the “precious” can we?

The average interest rate for housing loans for new agreements was 1.57 percent in November, which means that it dropped compared with October, when it was 1.59 percent.


There is much to consider here but first let me give you a clear example of the alternative universe which is inhabited by central bankers and their ilk.

Another positive in November was food prices continuing to rise and surprise on the upside.

The only group that should be welcoming this is farmers! Everyone else will be disappointed in the rise of a commodity so essential that it is called “non-core” by central bankers.

If we move to monetary policy then there are echoes of the situation in the Czech Republic that I analysed on Tuesday as we see another country where inflation had a strong December. Oh and I did mention the Riksbank’s poor Forward Guidance performance didn’t I?

Inflation therefore continues to surprise on the downside,

Now they are in danger of being wrong-footed as they continue with negative interest-rates and more QE designed to push inflation higher just as it approaches its target. In my opinion they are rather like Julius Caesar when he crossed the Rubicon as not only is inflation rising but economic growth looks solid.

A growth rate of 3.4 per cent is expected this year, a tenth higher than in the October forecast. Growth for 2017 has been revised upwards by 0.4 percentage points to 2.4 per cent.

Also they expect that the performance of the Krona in 2016 will further boost inflation.

The impact of the exchange rate on inflation has also been analysed. The Swedish krona has recently been unexpectedly weak.

Thus we find ourselves arriving at one of my earliest topics which was and is how central banks will reverse the extraordinary monetary policies they have implemented or more simply what is their exit strategy? So far Life’s Been Good for Sweden and the Riksbank but Joe Walsh also has a warning.

I go to parties sometimes until four
It’s hard to leave when you can’t find the door



Sweden and Denmark are offering an Alice In Wonderland future for monetary policy

Often we are told in Britain of the Scandanavian nations and Sweden in particular setting a good example and they are regularly held up as a model to follow. This particularly happens in the areas of social policy and education. However the last year or so has seen developments in monetary policy which has had me musing if they are setting a template for the future for all of us. This is in the area of negative interest-rates and expansionary monetary policy when you have an economy which is expanding and indeed booming. This is an inversion and some would say perversion of monetary policy theory where a central bank is supposed to lean against trends rather than give them a further push!

Denmark provides an example of this if we examine the situation described in the latest monetary review of its central bank the DNB. A Martian economist might think that things were going well at this point.

GDP growth in Denmark is expected to be 2.0 per cent this year and to remain at that level in 2016 and 2017. The projection thus reflects continuation and strengthening of the upswing that has already been underway for some time.

However our Martian economist will be scratching his or her head a little at this bit.

(The DNB) reduced the rate of interest on certificates of deposit on four occasions in January and early February, to -0.75 per cent. This is an all-time low for a Danish monetary policy interest rate.

The combination of solid growth with little or no consumer inflation might seem like not far off economic nirvana so why mess with it? We are seeing domestic policy in Denmark being made subservient to the exchange rate which is pegged to the Euro. A type of competitive devaluation our Martian might think should he or she be aware of the 1920s and 30s. Also our Martian would exclaim “you don’t say!” at this bit.

there is a risk that a prolonged period of very low interest rates will trigger an unhealthy development with self-reinforcing price rises for owner-occupied dwellings.

Ah a house price boom, what could go wrong? For now Denmark has a monetary environment where many mortgage bonds trade at negative yields and where households are unsurprisingly keen to remortgage.

indicating that the volume of remortgaging is exceptionally high, as was also the case last quarter.

So Denmark has potentially sacrificed balance in its internal economy on the altar of keeping its Krone pegged to the Euro. Unless of course you think that issuing Treasury Bills at -0.98% as it has done this morning – yes the investor and not the government is paying interest – is (the new) normal.


This is an even more extraordinary development as it has not been forced down this particular path by a type of fixed exchange-rate policy. Indeed as it is supposed to have a central bank accused of being “sado-monetarists” by Paul Krugman you might wonder  even more about its current path. Back on February 11th they made a move which would confuse our Martian economist even more which I described the next day as this.

This is very significant as imagine if growth happens as they anticipate and inflation does pick-up at the policy horizon of circa two years then they have just made completely the wrong move!

They moved into negative territory with interest-rates cut to -0.1% but in a Krugmanlike state of mind they decided that not only this but some QE was required as government bond purchases were announced. Only a fortnight or so later we discovered that economic growth was running at an annual rate of 2.7%. So very strongly pro-cyclical monetary policy as they add a supercharger to an engine that was already turbocharged!

What happened next?

There was another cut to -0.25% on UK Budget Day  as our Martian looked for some headache pills to stop his or her brain hurting. Now let me bring you fully up to date with some news from Sweden Statistics from this morning.

In March the annual growth rate for lending to households increased by 0.2 percentage points, from 6.2 percent in February to 6.4 percent in March.

As you can see the fear I expressed for Denmark seems to be bubbling along in Sweden and our Martian’s alarm would rise if we narrow our focus.

Housing loans account for 81 percent of total lending to households, and increased by SEK 160 billion to SEK 2 526 billion. The annual growth rate was thus 6.8 percent in March.

This boom has been at least partly caused by the fact that mortgage-rates are very low and have been falling. The numbers below compare to 2.43% a year ago.

Households’ average interest rates for housing loans for new agreements from MFIs fell from 1.81 in February to 1.74 percent in March.

Rather then being middle of the road that seems “chirpy,chirpy,cheap,cheap” to me and it would appear that Swedish companies think so too.

Most of the loans to non-financial corporations comprised loans with multidwelling buildings as collateral.

So there you have it a housing market which is being pumped up and a money supply which is either growing at an annual rate of 13.8% (M1) or 7% (M3). If we take a rule of thumb for wider monetary growth of 7% we subtract expected economic growth of 3% and get inflation of 4%. Thus a central bank of “sado-monetarists” would be singing along with Dawn Penn.


The Riksbank this morning

Firstly it confirmed its view that the outlook is bright from its eyrie by upgrading its economic growth forecasts.

The expansionary monetary policy is having a positive impact on the Swedish economy…….GDP growth in Sweden is good and the labour market is continuing to improve.

Thus our Martian looking at surging money supply growth and in particular lending for mortgages and housing would be expecting a tightening of policy. But instead rather than an economics text-book it would appear that the Riksbank has been reading Alice In Wonderland recently.

My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.

So rather than a tightening we got an expansion.

the Executive Board of the Riksbank has decided to purchases government bonds for a further SEK 40-50 billion.

Also a hint of more interest-rate cuts combined with a Forward Guidance style promise of lower interest-rates for longer.

In addition, the repo-rate path has been lowered significantly compared with the decision in February. The repo rate has been left unchanged at −0.25 per cent but may be cut further.

And in a Mad Hatter style panic they appeared willing to throw the kitchen sink at things.

The Riksbank is also prepared to launch a programme for loans to companies via the banks and to intervene on the foreign exchange market………..Purchases of other assets than government bonds are also a possibility.

I think that in terms of possible monetary expansion that is about it, for now at least! Although for some who had in my opinion really got carried away with their rhetoric that fact that there was not an interest-rate cut today was a surprise. Of course Lewis Carroll got there first.

Why, sometimes I’ve believed as many as six impossible things before breakfast.


There is much to consider at the moment from monetary policy in the Nordic regions but I am afraid that not much of it is good. Sweden in particular but Denmark too seem set on a helter-skelter type monetary policy where the economy is sacrificed to the growth now gods with this sort of perspective about time.

Alice:How long is forever? White Rabbit:Sometimes, just one second.

You have to ask what is the Riksbank of Sweden afraid of? If we are being told the truth about the Swedish economy,it is time for it to be reminded of the words on the front of the HitchHikers Guide to the Galaxy which in big friendly letters says.


Meanwhile the Bank of England may be observing a far slower quarterly GDP growth rate of 0.3% and think it is missing out on this fashion for negative interest-rates! Especially if the current rally in the UK Pound continues (US $1.53+,1.40 versus the Euro,182 Yen). at which point in my opinion the Nutty Boys should be on repeat.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain