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"And the first to turn is ....... SWEDEN !"

December 4, 2019

 

ref :- "Sweden to buck trend with interest rate rise" , The Financial Times, International Section

 

The Riksbank, Sweden's central bank (and the world's oldest, incidentally) , first took its policy rate into negative territory in early 2015. It has been as low as -0.5%, but was adjusted to -0.25% last December. Now the pundits are telling us that at its Dec 19th meeting, and at a time when other central banks (ECB , BoJ) are still embracing historically loose monetary policy, the Riksbank is expected to raise its interest rate back to zero.

 

Why might that be particularly worthy of note ? Well, if for example the Swedish economy was motoring along then it wouldn't be  --  but it's not motoring , it's stuttering. Or if the Riksbank was to hike because of concern about the weakness of the Swedish Krona  -- and with USD / SEK at SEK 9.54 it's still close to the historic weak point established recently (9.9483)  --  that would be interesting and possibly understandable. But then again Sweden's is an open economy with emphasis on manufacturing and exports and in that sense a weak currency is not altogether a bad thing. So to hike now against a background of "gloomy" economic data seems a bit strange.

 

But the Riksbank has plainly been uncomfortable for some time about the potentially damaging effects of a long period of negative rates, and they signalled their intention to return to positive  --  or at least zero  --  territory in October. Nobody really knows of course because we've never been here before, but many share the Riksbank's concerns. We probably shouldn't bore you yet again with what the concerns over negative rates (short and long-term) might be ...... but for good order's sake, here are a few :

 

* they reduce the profitability of banks, thus potentially undermining the banking system and in the meantime making banks LESS likely to lend rather than more (which was the intention)

 

* at the longer end, they depress market returns making life very difficult for the likes of pension funds and insurers who offer guaranteed payouts

 

* they penalise savers and create a "money illusion" whereby savers feel poorer and CUT consumption rather than boosting it (which again was the intention)

 

* they support "zombie" companies which would otherwise collapse in the normal way

 

* they create unhealthy and potentially very damaging asset bubbles , particularly in property markets  --  something that certainly applies to Sweden.

 

Some members of the Riksbank board have expressed a bias towards a higher interest rate rather than a lower one, but by no means all of them. Quite a few business leaders too are against any upward move in rates whilst the economy is struggling (as they would be), and there's a suggestion that the Riksbank may be about to act on fears of the unknown (i.e. the long-term consequences of an extended period of negative rates) , rather than taking appropriate action for the economy as it stands right now.

 

One of the problems for the Riksbank is that after they first took rates below zero, that year the economy grew at 4.4% and carried on showing robust growth for the next two years. Over the same period, inflation  --  the pursuit of which was the main aim of negative rates in the first place, remember  --  climbed from a rate of below zero to marginally above the target rate of 2.00 %. Critics therefore argue that if the Riksbank wants to "normalise" monetary policy  --  and most would agree that's a laudable goal if conditions are right  --  then why didn't they do it then rather than now when the economy is slowing and the infaltion rate is on the way down again ?

 

Good question .... and the answer may be that the Riksbank has come to a conclusion of its own when it comes to the question the whole world has been debating for some time .... and that is of course whether monetary policy has shot its bolt, and that there's little or no more that it can achieve. In Sweden rates have been below zero for nearly five years and through its Quantitative Easing programme (QE) the Riksbank already owns just about half of the Swedish government bond market. It's almost as though they're saying "Really, what more can we do ? And if what we're doing is not effective, we'd be better off getting rates out of negative territory even if it's only so that we can cut them again later".

 

Or to quote David Oxley of Capital Economics on the Riksbank : "They are the first monetary authority to throw in the towel and admit they're pretty much out of ammunition, and what ammunition they have, they don't want to use".

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