Late last month, Sweden tripled down on QE, as the Riksbank announced it would expand its asset purchases by SEK65 billion. Or, visually:
The recent history of Swedish monetary policy is viewed by some as a cautionary tale about what can happen when a central bank attempts to normalize policy too “early.” As a reminder, the Riskbank began raising rates in 2010. Reminiscing about the bank’s decision four years later, Paul Krugman blew a gasket on the way to accusing Sweden of being a nefarious lot of job hating heretics hell bent on perpetuating global inequality by enriching creditors at the expense of impoverished debtors.
Of course Krugman needn’t have been so hard on the Riksbank. After all, they reversed course a little over a year later and since then, it’s been nothing but easing as the repo rate fell 35 bps into negative territory.
The problem, as we’ve documented quite extensively, is that Sweden’s adventures in NIRP-dom have done little to boost inflation (to be fair, unemployment has fallen).
For the Paul Krugmans of the world, that’s evidence of a hangover from the series of hikes the Riksbank embarked on beginning in 2010. For anyone who is sane, it’s evidence that, i) unconventional monetary policy is bumping up against the law of diminishing returns , and ii) when everyone is easing, no one gets the benefits.
But while NIRP may not be doing much for inflation, it sure has been effective at creating a rather scary looking housing bubble. Have a look:
We discussed this at length in “Sweden Goes Full Krugman, Gets Massive Housing Bubble.” Here’s what the Riskbank had to say about this after its September meeting:
“Low interest rates contribute to the trends of rising house prices and increasing indebtedness in the Swedish household sector continuing. Current debt levels already pose a substantial risk to the Swedish economy. It is thus essential that the Riksdag (the Swedish parliament), the Government and other authorities implement measures to reduce this risk. If no measures are taken, this, in combination with the low level of interest rates, will further increase the risks, which may ultimately be very costly for the economy.”
So ultimately, Stefan Ingves was pulling the old “blame lawmakers” card in an effort to exculpate Riksbank policy. Commenting further on macroprudential policy, Inves said the following: “We deal with inflation, we keep an eye on the exchange rate, we do our best to reach our inflation target. But that means that somebody else has to deal with the problem we have in our housing market.”
On Wednesday, the Riksbank is out with its latest Financial Stability Report and the focus is sqaurely on the housing bubble.
“Valuations on both the asset markets and the housing market in particular are unusually high at present [and] this means that the probability of a fall in prices is elevated,” the bank says, adding that “together with increasing indebtedness in the household sector, this has made households, the financial institutions and the financial system as a whole more vulnerable.”
To be sure, the Riksbank would control macroprudential policy making if it could, but efforts to move in that direction have been stymied in the past and so, Ingves and co. are free to put the burden off on the FSA rather than just admit that krona strength and the CPI be damned, it’s time to normalize policy. Here’s more from the report:
It is of the greatest importance that the mandate for macroprudential policy of Finansinspektionen (the Swedish financial supervisory authority) be clarified as soon as possible so that efficient macroprudential policy can be conducted in Sweden.
Reforms on the housing market aimed at finding a better balance between supply and demand of housing may slow down the rise in housing prices and thereby also indebtedness. Reforms are also needed to reduce households’ willingness to take on debt, such as gradual reductions to tax relief and loan-limiting measures such as an amortisation requirement and a debt-to-income limit. The Riksbank thus considers that there is an urgent need for a combination of measures to both subdue new lending and reduce the risks inherent in existing loans.
Just to drive the point home, have a look at the following two charts from the report which show the rise in housing prices versus disposable income growth and the inexorable increase in household debt:
As Reuters notes, “Swedish household debt levels, at around 170 percent of disposable income, are among the highest in Europe.”
Here’s a look at the supply/demand imbalance along with average debt for households with mortgages:
As you can see, this is a big, big problem, and it’s not confined to Sweden. Norway and Denmark are facing the same reality. The problem, as we’ve documented on any number of occasions (see here and here for instance), is that in a world dominated by beggar-thy-neighbor monetary policy, one rate cut necessitates another in a race to the bottom as everyone scrambles to, i) keep their currency from soaring and ii) keep the inflationary impulse alive. In other words, the most effective way for Sweden to combat the housing bubble is obviously to stop inflating it by pushing rates further into NIRP-dom.
But that’s impossible when Mario Draghi is set to break out the bazooka next week unless the Riksbank wants to just throw in the towel on the global currency wars. Indeed, Nomura believes that the Riksbank “will likely to be proactive after expected ECB decision to cut deposit rate further [and there’s a] high possibility of 10-15bps Riksbank rate cut.”
So as worried about the bubble as Stefan Ingves may be, he’s apparently not worried about it enough to arrest the central bank’s descent into the Keynesian Twilight Zone.
Ultimately, the Riksbank believes that the combination of “unusually high housing prices” and overly indebted households means that in the event of an economic shock “the consequences for the Swedish economy could be great.”
Now if only the bank would heed its own warning and normalize policy instead of merrily following the ECB, the SNB, and the Nationalbank as they’re lured into the woods by Pied Piper Krugman.
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