The Swedish monetary experiment faces the decline of both cash and house prices

It is time to take a look again at the policies of the world’s oldest central bank as we remain in the Baltic region. From the Riksbank of Sweden.

In 1668, the Riksdag, Sweden’s parliament, decided to found Riksens Ständers Bank (the Estates of the Realm Bank), which in 1867 received the name Sveriges Riksbank. The Riksbank is thus the world’s oldest central bank. In 2018, the Riksbank will celebrate its 350th anniversary.

Yesterday brought news which will cheer the Swedish government as it received something of a windfall from this creation mostly due to a revaluation of its gold reserves. It has some 125.7 tonnes much of which is in London ( or not if you believe the conspiracy theories).

The General Council proposes that SEK 2.3 billion be transferred to the Treasury.

However the last bit of the 350 years has seen the Riksbank break new ground proving that you can teach an old dog new tricks.

In light of this, the Executive Board has decided to hold the repo rate unchanged at −0.50 per cent.

This was announced last week and technically applies from tomorrow although of course it is a case of what might be called masterly inaction. We see that the world of negative interest-rates not only arrived in Sweden but continues and in fact if we look deeper we see that it has an interest-rate of -1.25% on bank reserves which is the lowest to be found anywhere.

Also we see that the Riksbank surged into the world of Quantitative Easing bond buying.

The Riksbank’s net purchases of government bonds amount to just over SEK 310 billion, expressed as a nominal amount. Until further notice, redemptions and coupon
payments will be reinvested in the bond portfolio.

As you can see policy is now set to maintain the stock of QE with any maturing bonds reinvested. So our old dog learnt two new tricks which does provide food for thought when we note a 350 year history after all why was it not necessary before. Also as we look ahead we see signs of a third new trick.

Economic outlook

This seems set fair.

Indicators for the fourth quarter suggest that GDP growth
picked up at the end of last year………Monthly indicators for demand and output also indicate that GDP growth at the end of last year was stronger 
than normal. Both industrial and services production have increased………. 
The model forecasts indicate GDP growth of 3.9 per cent during the fourth quarter, compared with the previous quarter and
calculated at an annual rate.

So economic growth has been good as this would be added to this.

 GDP increased 2.9 percent, working-day adjusted and compared to the third quarter of 2016.

If we look back we see that GDP is around 16% larger than at the pre credit crunch peak of the last quarter of 2007. Looking ahead the Riksbank expects economic growth of the order of 3% annualised at the opening of 2018 with growth slowing a little in subsequent years.

Employment

As you might expect with strong economic growth seen the situation here has been positive too.

Last year, the number of redundancy notices reported to
Arbetsförmedlingen (the Swedish public employment agency) was at the lowest level since 2007 and the level of 
newly reported vacant positions was very high . The strong demand meant that both the employment 
rate and the labour force participation rate reached historically high levels.

Yet in spite of other signs of what has been in the past come under the category of overheating ( resource allocation is at its highest ever) we seem something very familiar.

 Estimates indicate that the definitive outcome for short‐term wages in the economy as a whole for the full year 2017 will, on average, increase by 2.5 per cent, 
which entails a downward revision compared with the forecast in December.

These days wage growth nearly everywhere we look in what we consider to be the first world is around 2% and seems to have completely disconnected itself from many factors which used to drive it. Is this another side effect of the QE era? In Sweden we see that businesses seem reluctant to pay more.

the preliminary rate of wage increase is significantly higher in the public sector than in the business sector. 
recent outcomes indicate that wage increases at the start of 2018 will also be lower than in the Riksbank’s 
assessment from December.

Unemployment

The overall rate of unemployment has fallen less than you might think due to this.

The large increase in the labour force led to
unemployment.

Which is further explained here as we wonder what “weaker connection to the labour market” means.

 Unemployment has not fallen further among those born abroad 
partly because the inflow of labour in this group has been large, 
but also primarily because people born outside Europe, on average,
 have a lower education and a weaker connection to the labour market.

So in reality there are two labour markets here where the Swedish born one is at what was considered to be full employment. Bringing them both together gives us this for January.

Smoothed and seasonally adjusted data shows an increase in the employment rate and a decrease in the unemployment rate, which was 6.5 percent.

Inflation

This morning’s update from Sweden Statistics told us this.

The inflation rate according to the Harmonised Index of Consumer Prices (HICP) was 1.6 percent in January 2018, down from 1.7 percent in December 2017. The HICP decreased by 0.9 percent from December to January.

The inflation number above is using the same methodology as in Europe and the UK and as you can see there is not a lot of inflation for an “overheating” economy. The Swedish measure called CPIF fell from 1.9% to 1.7% leading some to seemingly lose contact with reality.

Is Sweden’s inflation shortfall – short-term core trend below 1% versus 2% target – a serious concern? ( SRSV )

Not for Swedish consumers nor for workers as we note that in the past at least Sweden can have inflation.

The CPI for January 2018 was 322.51 (1980=100).

Those who follow my specialist interest in inflation measurement may have a wry smile at the cause of the fall.

 In January 2018, the basket effect contributed -0.2 percentage point to the monthly change in the CPI, which is close to the historical average.

Comment

There is a lot to consider here and the first is a familiar one of how will the Riksbank exit from its negative interest-rates and QE? It was promising interest-rate rises later this year but we have seen those before and the dip in the inflation rate puts it between a rock and a hard place which is before we get to this. From Bloomberg last month

Data released on Monday showed that home prices continued to slide in December, dropping 2 percent in the month, according to the Nasdaq OMX Valueguard-KTH Housing Index, HOX Sweden. The three-month drop was 7.8 percent, the steepest decline since late 2008. Prices were down 2.5 percent from a year earlier, the biggest drop since March 2012.

This may be a response to new rules that have been imposed in recent times on interest-only mortgages in response to this reported by Reuters.

Currently, around 70 percent of Swedish home owners have interest-only mortgages, meaning they do not pay off any of the principal of the loan they have borrowed.

Care is needed with the house price data as the official numbers show rises continuing but as 2018 progresses it too should be picking up ch-ch-changes. This leaves the Riksbank in something of a pickle of its own making as many of its members from the last 350 years would recognise but not apparently those in charge now. Especially as the economic growth in the credit crunch era does not look quite so good when we note the population has increased by around 9%.

Meanwhile we have yet another fail for economics 101 as I note this from Bloomberg earlier.

Last year, the amount of cash in circulation in Sweden dropped to the lowest level since 1990 and is more than 40 percent below its 2007 peak. The declines in 2016 and 2017 were the biggest on record.

With negative interest-rates one might have expected cash demand to rise but it has not returning me to me theme as yet untested that around 1.5% will be the crucial level. Still if nothing else Kenneth Rogoff will be delighted at the sight of Swedes waging their own war on cash. What could go wrong?

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Where next for house prices in Sweden and hence monetary policy?

Today has seen several strands of economic analysis come together so let us stay with yesterday’s topic of housing but move geographically from the UK to Sweden. There is food for thought in the issue that in the UK Sweden is often held up as an example in areas such as education, However there is more food for thought as I note that we are beginning to see denials that “something is going on” in the Swedish housing market as Todd Terry might put it. From the Financial Times.

There is no reason to anticipate a sharp fall in the Swedish housing market despite a housing boom that has seen prices more than double in the past 12 years, according to the chief executive of Stockholm-based Swedbank. The Swedish residential market will slow somewhat, Reuters reported Birgitte Bonnesen saying on a conference call after the bank’s quarterly results on Tuesday, but the chief executive does not see a risk of a sharp fall.

As Swedbank is the largest provider of mortgage credit in Sweden that is pretty close to an official denial that house prices are going to fall and we have learnt what to do with them! Even it had to admit that it does appear that ch-ch-changes are afoot.

Although she acknowledged the Swedish housing market “showed signs of further slowdown” in the latest quarter and the rise in house prices had “dampened”, Ms Bonnesen said the softening — accompanied by a slowdown in the build-up of household debt — was “positive, as it contributes to more sustainable economic development”.

Ah so a bank claiming that lower lending is “positive” so it would have presented its own higher lending in the boom as negative then would it? Of course as you can see below the Financial Times seems to be more concerned about “The Precious” than the effect on the real economy.

Concerns have grown that house prices — which have reached record levels — and mounting household debts somewhat echo the 1990s Swedish banking crisis. If there is a housing market slump and loan losses rise, that could damage the Scandinavian banking sector.

What is going on?

Sweden Statistics tells us that the credit taps seem pretty fully open for housing purposes.

In August, households’ housing loans amounted to SEK 3 035 billion, which is an increase of SEK 17 billion compared with the previous month and SEK 203 billion compared with the corresponding month last year. This means that the annual growth rate of housing loans was 7.2 percent in August, an increase of 0.1 percentage point compared with July.

In addition to the quantity or flow of loans the price or if you prefer mortgage rate is very low.

The average housing loan rate for households for new agreements was 1.58 percent in August, which is unchanged compared with July. The floating interest rate for housing loans was also unchanged compared with the previous month.

Ordinarily lots of cheap money would lead to surging house prices but maybe we have already seen that.

That gives us a longer=term perspective for Stockholm and if we look wider I note that Aviva investors have just tweeted a chart on asset bubbles which has Swedish property price growth at the top just pipping Canada and New Zealand. If you want a wry smile the surge in house prices began as the inflation targeting era began! But with thanks to Finwire and Google Translate this emerged earlier this month.

The prices of condominiums were unchanged in September. This has risen marginally last month. The villa prices, which remained unchanged in August, rose by 1 per cent. This is evidenced by figures produced by Statistics Sweden on behalf of Swedish Mäklarstatistik

Compared to three months ago, prices for both condominiums and villas have risen by 1 per cent. At year-end, price development is +6 percent for condominiums and +9 percent for villas.

So there seems to be something of a fading and maybe a lull if we add in the bit below.

Generally, we have a somewhat cautious market where we see that an increased supply is not matched by
same increase in sales volume……. we also see a gradual increase in the average time it takes between that
The ads are being put out and the property is then being sold.

So there is more supply and a longer time is required to sell neither of which look bullish.

Is Stockholm the canary in the coalmine?

It is hard not to think of London and in my case Nine Elms in particular when you see something like this.

There is not much optimism to be seen there to say the least. Also are such share price falls even legal these days? Perhaps the Riksbank of Sweden should take a trip to Tokyo to see how the Bank of Japan would deal with such a matter. Or they could simply assume that the official data series is more accurate.

Real estate prices for one- or two-dwelling buildings rose by almost 3 percent in the third quarter of 2017 compared with the second quarter. Prices rose by nearly 9 percent on an annual basis in the third quarter, compared with the same period last year.

Comment

There is a lot to consider here so let us bring in the policy of the Swedish central bank the Riksbank.

The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at −0.50 per cent and is expecting, as before, not to raise it until the middle of 2018. The purchases of government bonds will continue during the second half of 2017,

As you can see it is full steam ahead for monetary policy with it being very rare amongst major central banks at hinting of continuing very easy policies. We will find out more later this week as its hand may be forced by what the European Central Bank decides and in particular how the Euro exchange rate responds. If the Riksbank had a choice I am sure it would rather be voting on Friday after the ECB rather than tomorrow. Perhaps it can watch the film Bad Timing to fill in the gap.

Also there is something to mull about the state of the real economy summarised here a month ago by the Riksbank itself.

Economic activity in Sweden is strong; GDP grew rapidly in the second quarter and the employment rate is at a historically high level. Inflation has continued to rise and in recent months been higher than expected.

Some would regard that as grounds for a tightening of monetary policy. Of course should it decide to prioritise a weakening housing market with obvious implications for the banks then this would make it easier.

Between 2007 and 2015, cash in circulation decreased by nearly 15 per cent. Cash withdrawals have declined by around a half, both in number of withdrawals and volume of cash withdrawn, over the past ten years…..By far the most common way of paying for goods in shops is by debit or credit card. Around 97 per cent of the population has access to a card…..Sweden is one of the countries in the world where the most card payments are made. The average Swedish citizen made 290 card payments in 2015. The average for the European Union is 104 card payments per year. ( Riksbank in June)

Sweden has economic growth of 4% with an interest-rate of -0.5%

We can end the week with some good news as the economic growth figures produced so far today have pretty much varied between better and outright good. For example I note that the 0.5% growth for France makes its annual rate of 1.8% a smidgen higher than the UK for the first time in a while. Also Spain has continued its series of good numbers with quarterly GDP ( Gross Domestic Product) up by 0.9%. But the standout news has come from the country which I have described as undertaking the most extraordinary economic experiment of these times which is Sweden.

Sweden’s GDP increased by 1.7 percent in the second quarter of 2017, seasonally adjusted and compared with the first quarter of 2017. The GDP increased by 4.0 percent, working-day adjusted and compared with the second quarter of 2016.

Boom! In this case absolutely literally as we see quite a quarterly surge and added to that growth in the previous quarter was revised higher from 0.4% to 0.6%. This means that it grew in the latest quarter by as much as the UK did in the last year and is the highest quarterly number I can think of by such a first world country for quite some time.

If we look into the detail there is much to consider. There was something unusual for these times.

Production of goods rose by 3.0 percent, and service-producing industries grew by 1.7 percent

It also looks as though the demand was domestic as trade was not a major factor.

Both exports and imports grew by 0.7 percent

There was a sign of booming domestic consumption here.

Household consumption increased by 1.1 percent

Also investment went on a surge.

Gross fixed capital formation increased by 3.8 percent.

However there is kind of an uh-oh here as I note this from Nordea.

Residential construction continues to be a very important growth driver (scary!), but also other investments seem to have picked up and more than forecast.

We will look at that more deeply in a moment but first let us note that the numbers below suggest that productivity has picked up.

Employment measured as the total number of hours worked increased by 0.8 percent seasonally adjusted, and the number of persons employed increased by 0.6 percent.

The Riksbank

The latest minutes point out that the monetary policy pedal remains pressed pretty much to the metal.

At the Monetary Policy Meeting on 3 July, the Executive Board of the Riksbank decided to hold the repo rate unchanged at –0.50 per cent. The first rate increase is not expected to be made until the middle of 2018, which is the same assessment as in April. The purchases of government bonds will continue during the second half of 2017, in line with the plan decided in April.

Still they did say they were now less likely to push it even harder.

it is now somewhat less likely than before that the repo rate will be cut further in the near term

Rather amazingly they described the policy as “well-balanced” but I guess you have to think that to be able to vote for it. However today’s data will be welcome in a headline sense but is yet another forecasting failure as they expected 0.7% GDP growth. Now a 1% mistake in one-quarter makes even the Bank of England’s failures at forecasting to be of the rank amateur level.

Let us move on with the image of the Riksbank continually refilling the punch bowl as the party hits its heights as opposed to removing it.

What could go wrong?

Even the Riksbank could not avoid mentioning this.

the risks associated with high and rising household indebtedness were also discussed.

Did anybody mention indebtedness?

In June, the annual growth rate of households’ loans from monetary financial institutions (MFIs) was 7.1 percent, which means that the growth rate increased by 0.2 percentage points compared with May.

So the rough rule of thumb would be to subject economic growth and estimate inflationary pressure at 3% which of course would lead to interest-rates being in a very different place to where they are. Also if you look at the issue of the domestic consumption boom you be rather nervous after reading this.

Households’ loans for consumption had a growth rate of 9.4 percent in June, an increase compared with May, when it was 7.3 percent.

I noted earlier the fears over what is happening in the housing market and loans to it have just passed a particular threshold.

In June, households’ housing loans amounted to SEK 3 005 billion, which means that lending exceeded SEK 3 000 billion for the first time. This is an increase of SEK 27 billion compared with the previous month, and of SEK 198 billion compared with the corresponding month last year. This means that housing loans had an annual growth rate of 7.2 percent in June, an increase of 0.1 percentage point compared with May.

Another bank subsidy?

I have noted before that fears that negative interest-rates would hurt bank profits have been overplayed and as we note mortgage and savings rates we get a hint that margins are pretty good.

The average housing loan interest rate for households for new agreements was 1.57 percent in June…….In June, the average interest rate for new bank deposits by households was 0.07 percent, unchanged from May.

I also note that banks remain unwilling or perhaps more realistically afraid to pass on negative interest-rates to the ordinary depositor.

House prices

Of course this will look very good on the asset side of the balance sheets of the Swedish banks.

Real estate prices for one- or two-dwelling buildings rose by almost 4 percent in the second quarter of 2017 compared with the first quarter. Prices rose by nearly 10 percent on an annual basis in the second quarter, compared with the same period last year.

In terms of amounts or price it means this.

The average price at the national level for one- or two-dwelling buildings in the second quarter 2017 was just over SEK 2.9 million.

If we look back we see the index which was based at 100in 1981 ended 2016 at 711 and we learn a little more by comparing it to the 491 of 2008. There was a small dip in 2012 but in essence the message is up, up and away. For owners of Swedish houses it is time for some Abba.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world
Aha-ahaaa
All the things I could do
If I had a little money
It’s a rich man’s world

Comment

If we go for the upbeat scenario then it is indeed time for a party at the Riksbank as we see Sweden’s economic performance in the credit crunch era.

The problem with being top of the economic pop charts is that it so often ends in tears. The clear and present danger is the expansion of lending to the housing market and the consequent impact on house prices. Also the individual experience is not as good as the headline as the population grew by 1.5% in the year to May to 10.04 million which of course is presumably another factor in higher house prices.

 

 

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

Comment

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.

 

 

 

 

Sweden expands monetary policy into an economic boom

Let us begin today with some good news which has emerged from the statistics office of Sweden.

Sweden’s GDP increased by 1.0 percent in the fourth quarter of 2016, seasonally adjusted and compared with the third quarter of 2016.

That is a fast rate of economic growth for a developed country in these times. Actually it would have always have been pretty good. If we move to the detail there was more good news.

Gross fixed capital formation increased by 0.9 percent. Exports increased by 1.8 percent and imports decreased by 0.2 percent.

So Investment and export-led growth which accompanied a rise in production.

Production of goods increased by 0.4 percent and service-producing industries grew by 1.4 percent.

Also it looks as though productivity increased as well as both the numbers below are lower than the 1% output growth.

Employment measured as the total number of hours worked increased by 0.3 percent seasonally adjusted, and the number of persons employed increased by 0.6 percent.

The annual figure is also good but it is plain that it was mostly driven by the last quarter of 2016.

The GDP increased by 2.3 percent, working-day adjusted and compared with the fourth quarter of 2015.

Inflation looks set to rise

One of the main factors in the outlook for inflation is the producer price series which tells us what is coming over the horizon but Sweden has a wider number which includes trade as well as production.

Domestic supply, that is, producer prices on the domestic and import markets together, increased 0.8 percent from December to January and 8.5 percent compared with January last year.

So a surge is on its way and the strongest part is coming from trade.

In the same period, prices on the export market and the import market increased 10.6 percent and 11.3 percent respectively. A part of the increase can be explained by the depreciation of the Swedish krona against other major currencies. On the domestic market, prices increased 5.8 percent in the same period.

So as I discussed only yesterday more generally inflation is on its way as 2017 progresses.

Inflation now

This was impacted in January by the sales season and by an adjustment to the basket of goods used which subtracted 0.1% and was therefore unusual in seeing a drop in the annual rate.

In January 2017, the inflation rate according to the Consumer Price Index (CPI) was 1.4 percent, down from 1.7 percent in December 2016. The CPI fell by 0.7 percent from December 2016 to January 2017.

However even with the drop we see that inflation seems set to move towards its target in 2017.

House Prices

Another sign of inflation can be seen from asset prices of which the clearest and most transparent is house prices so let us take a look.

Real estate prices for one- or two-dwelling buildings rose by almost 1 percent in the last three-month period, from November 2016 to January 2017, compared with the previous period, from August to October 2016. Prices rose by nearly 9 percent on an annual basis in the last three-month period, from November 2016 to January 2017,

In terms of actual prices those percentages mean this.

The average price at national level for one- or two-dwelling buildings in the period from November 2016 to January 2017 was SEK 2.85 million.

If we look for perspective I note that the index was set at 100 in 1980 and that in 2013 it was 554. We learn something from that but as we move on 2014 was 592 or 7% higher than 2015 was 656 or around 11% higher than a year before and 2016 was 711 or around 8% higher than a year before. So there has been plenty of inflation to be seen here and it must be a hard time to be either a first time buyer or someone looking for a larger property in Sweden right now.

Monetary Policy

There was a time that central bankers would respond to fast GDP growth combined with fast rises in house prices and rising inflation with an interest-rate rise so let us look at Riksbank policy.

Monetary policy therefore still needs to remain expansionary. The Executive Board of the Riksbank has decided to hold the repo rate at −0.50 per cent and there is still a greater probability that the rate will be cut than that it will be raised in the near term.

Oh and it is continuing to buy government bonds to add another stimulus to the economy.

The purchases of government bonds will continue for the first six months of 2017, as was decided in December.

That is getting to be a problem as this from The Local illustrates.

“We have had me as finance minister for two years, and we have had a surplus in public finances for two years,” Andersson said at a press conference. Overall, public finances have been strengthened by almost 40 billion kronor ($4.26 billion) compared to 2015,the authority said, with reduced sickness benefit and migration costs contributing to that.

As you can see there is not going to be a ready supply of government bonds to buy and the Riksbank must have created a false market already and is on its way to being a sort of Stockholm Whale in the Swedish government bond market.

Yet so entrenched is it in its views it feels the need to promise even more.

The Executive Board has also taken a decision to extend the mandate that facilitates a quick intervention on the foreign exchange market.

Let me use their own words as a critique of this.

In Sweden, the Riksbank’s expansionary monetary policy has contributed to high growth, falling unemployment, rising inflation and inflation expectations that are back at 2 per cent.

Now please look again at the policies they are enacting.

Comment

There is much to consider here from a central bank that was once accused of being “sado-monetarists” by Paul Krugman of the New York Times. These days they must be basking in his praise. Except there are a lot of questions to be answered here. Let me illustrate with another statistic from the monetary sector.

Households’ loans had a 6.7 percent annual rate of increase in the fourth quarter of 2016, which is 0.4 percentage points lower than in the third quarter.

So a fast rate as we note that it is slower than it was! So the monetary taps have been pretty much fully open. In terms of actual numbers here they are.

Households’ loans increased by SEK 56 billion in the fourth quarter of 2016 and amounted to SEK 3 729 billion at the end of the quarter. During the entire year of 2016, households’ loans increased by SEK 235 billion, which is SEK 6 billion more than the increase in 2015.

But here is the “rub” as Shakespeare would put it. How does it work that you have the monetary taps fully open when aggregate economic growth has not only been quite good but is also expected to be? If we go deeper how would they respond to any slow down or recession? The economy has got used to a type of junkie culture on an aggregate scale.

Mind you there is another perspective on this which we get if we look at the population numbers.

In 2016, the number of people listed in Sweden’s population register increased by 144 136, and at the end of the year the population figure was 9 995 153.

So up by 1.5% which means that in terms of per capita the GDP growth fades considerably and we see the fear of the Riksbank and why the ordinary Swede may wonder why things do not seem to be getting much better.

Measuring inflation

I note that the Swedes are abandoning a system the UK ONS is pressing for! I mentioned yesterday the way it wants to use rents for properties which are not rented well look at Sweden.

Cost development for owners of tenant-owned dwellings is currently represented by rental development in multi-dwelling buildings. The new measurement will consist of three main sub-indices – interest costs, the monthly fee for the tenant-owned apartment, and apartment repairs.

Charlotte Hogg

For those of you who are unaware Charlotte is the new Deputy Governor at the Bank of England for markets which includes QE. I will give my view of her woeful performance this morning in front of the Treasury Select Committee another time but for now here are some other views.

For the new DG Markets, Charlotte Hogg has a pretty shaky grasp of QE, transmission mechanism and market impact. ( h/t @moyeenislam )

 

Charlotte Hogg grew up in a moated country house, where evenings were spent debating Thatcherite privatisations  ( h/t @Ian_Fraser )

 

Charlotte Hogg says “didn’t know” what her banker brother did at Barclays before she asked him for a TSC questionnaire. Odd ( h’t @BenChu_ )

 

 

 

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 £ 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.

Riksbank

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.

Comment

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

 

 

How is the demonetisation of India going?

A feature of these times is what I have labelled as the war on cash . In essence this war involves the establishment blaming it for financial crime and tax evasion. The High Priest of such thoughts Kenneth Rogoff is giving a talk this evening on this very subject at the London School of Economics.

Tomorrow at LSE: Leading economist on why we should get rid of most paper money

I did reply to enquire if they meant leading as in leading everyone off a cliff? Unfortunately I cannot be there as I will be on Share Radio but I do hope that someone will ask why if all the interest-rate cuts have not worked going further into negative territory will?

India and Demonetisation

This is an area where it is hard not to think of our Ken and his pet theories. Back on the 11th of this month I explained what had taken place.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

They were taking advantage of a public holiday to facilitate the move.

All ATMs and other cash machines will remain shut on November 9, 2016 to facilitate recalibration

After that there were going to be limits on what cash could be withdrawn.

cash withdrawal from a bank account over the counter shall be restricted to ₹ 10,000/- per day subject to an overall limit of ₹ 20,000/- a week from the date of the notification until the end of business hours on 24th November, 2016, after which these limits shall be reviewed.

So we are pretty much there especially if we allow for the time difference so how has it gone? The Hindustan Times gives us some insights.

“Consumers have not had the cash to complete purchases, and there have been reports of supply chains being disrupted…The time spent queuing in banks is also likely to have affected general productivity… ,” said Fitch, one of the world’s three big rating agencies alongside Moody’s and Standard & Poor’s.

It gave specific examples of industries which have been affected.

The automobile industry, which accounts for 7.1% of the GDP, is witnessing a fall in stock prices of up to 12% since the demonetisation. Himanshu Sharma, auto analyst at Centrum Broking, said two-wheeler sales can get affected by 40- 45%. The impact on cars is less, since most of them are bought on loan, but it could still be 10-12%……..Things aren’t any better with pharmaceutical companies, as sales of medicines have plunged almost 15%.

Why has the pharmaceutical industry been affected? Well something of a shambles seems to have been at play here.

Even though chemists are allowed to take old currency notes, distributors are not.

It goes onto point out that in the words of Taylor Swift there was always going to be “trouble,trouble,trouble” if you withdrew 86% by value of bank notes in the country described below.

This was only to be expected in a country which has 20% of its $1.8 trillion GDP and 80% of employment in the unorganised sector. Nearly half the population still does not have a bank account. Less than 300 million use the internet, and therefore the overwhelming majority cannot make electronic payments.

Ch-ch-changes

The initial statement implied that ATMs would be up and rolling after the bank holiday yet if we look at the Reserve Bank of India today we are told this.

17. Can I withdraw from ATM?

The ATMs are progressively getting recalibrated. As and when they are recalibrated, the cash limit of such ATMs will stand enhanced to ₹ 2500/- per withdrawal.

There has been a specific change today which tries to cover the Indian habit of paying for weddings in cash.

With a view to enable members of the public to perform and celebrate weddings of their wards it has been decided to allow a cash withdrawal of maximum ₹ 250000/- from their bank deposit accounts till December 30, 2016 to meet wedding related expenses.

A fundamental point through all this is the assumption implied below.

7. ₹2000 cash is insufficient for my need. What to do?

You can use balances in bank accounts to pay for other requirements by cheque or through electronic means of payments such as Internet banking, mobile wallets, IMPS, credit/debit cards etc.

This is all very well for those applying the move who no doubt have these but India’s many poor? They do not.

What about the economic effect?

Back on the 11th I reported on the official view.

I hope that they have success in that and also that the official claims of a 1.5% increase in GDP as a result turn out to be true.

How is that going? From Bloomberg.

The most pessimistic of these estimates comes from Ambit Capital which says GDP (gross domestic product) growth could crash to 3.5 percent. Others like HDFC Bank and HSBC are paring down GDP growth estimates by 0.5 – 1 percentage point.

Down seems to be the new up yet again. There are also concerns about rising prices due to shortages as industries wonder why weddings get relief but they do not?

What does Kenneth Rogoff think?

You might think he would be cheering and high-kicking but no.

The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.

Indeed for a man whose plans for ever more negative interest-rates require an elimination of cash this is not far-off breathtaking.

First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time.

Mind you what is “less convenient”?! Our Ken is trying to have his cake and eat it here. Also I have a few £10 notes and a £20 note in my jacket pocket and will give them a serious telling off later.

the vast bulk of physical currency is held in the underground economy, fueling tax evasion and crime of all sorts.

Sweden

This comes to mind as it is a type of polar opposite to India in that so much of its money is already electronic. So I noted this from Cecilia Skingsley of the Riksbank on the 16th.

Will we have e-krona in an e-wallet in the future, as naturally as we now have a wallet with cash in it? The less those of us living in Sweden use banknotes and coins, the clearer it becomes that the Riksbank needs to investigate whether we should issue electronic money as a complement to the money we have today.

Is complement the new euphemism for replace? Convenient should you ever find yourself looking to take the official interest-rate lower than -0.5%. Indeed one of the accompanying slides poses this question.

Should we accept that the use of cash comes to an end?

Comment

This was always going to be a very difficult thing to do in India. The stated reasons are on their own good ones as India plainly has severe problems with corruption and the underground economy. The issue can be expressed Bob the Builder style ” Can you fix it?” I note some pointing out that in India corruption is regularly to be found at the top of the system. Also according to Live Mint Credit Suisse has reported this.

In the last two years, the share of the top 1% has increased at a cracking pace, from 49% in 2014 to 58.4% in 2016.

if you were looking for corruption where would you start after seeing that? it makes our 1% in the UK seem lightweights doesn’t it? It reminds us also of the point that a lot of crime takes place in electronic finance as the recent issues at Tesco bank illustrated in the UK. The ordinary Indian can still be affected by this although of course it is indirect for many. Maybe someone tonight will ask our Ken about online financial crime?

There are differences to the western war in cash in that India for example has interest-rates of around 6% as opposed to the -0.5% of Sweden. But there are also similarities.

As to language let me translate a speech given today by Kristin Forbes of the Bank of England. Here is the entry in my financial lexicon for these times.

Uncertainty: This means we were wrong, “This is well above the consensus expectation by economic forecasters, as well as the MPC forecast. ” But as we are so intelligent and nobody else we meet at dinner parties thought anything else that’s fine…

Sad really as she is perhaps the brightest member of the Bank of England

Share Radio

I will be on the Simon Rose show after the 7 pm news tonight and already there is much to discuss.