Sweden's Mortgage Shift Saps `Trust' in Riksbank's Interest-Rate Forecasts
A flag of the Swedish Central Bank flies in Stockholm
Casper Hedberg/Bloomberg
A flag of the Swedish Central Bank flies from a flagpole outside the building in Stockholm on Nov. 18, 2008.
A flag of the Swedish Central Bank flies from a flagpole outside the building in Stockholm on Nov. 18, 2008. Photographer: Casper Hedberg/Bloomberg
Swedish house buyers shifting to adjustable-rate mortgages from fixed-rate loans means the Riksbank can cool the economy with fewer rate increase than it currently predicts, according to Danske Bank A/S and SEB AB.
Home loans tied to money-market rates now account for more than 60 percent of the market, up from less than 40 percent at the start of 2006, when the bank last started raising rates, according to Statistics Sweden. Economists say the Riksbank may underestimate its power, casting doubt on its prediction that it will need an average borrowing cost of 2.1 percent by the third quarter of next year and 3.8 percent two years later.
“We don’t believe the Riksbank will have to raise the rate as much as they forecast,” said Michael Grahn, a Stockholm- based economist at Danske Bank, the second-biggest Nordic lender by assets. “During the last two years, household debt has increased quickly and a bigger slice of that debt is at an adjustable rate, which means that Riksbank rate hikes will have a very, very big effect.”
Since it started providing numerical rate forecasts in February 2007, the Riksbank revised its rate path 13 times out of 20. In December 2008, the bank said its main rate would average 2.5 percent in the fourth quarter of this year, compared with the 0.5 percent policy makers raised the benchmark to last month. Three-month forward-rate agreements due September 2011 have eased 18 basis points since the end of June to 1.68 percent on Aug. 12, Bloomberg data show.
‘Significant Errors’
“It’s harder than usual to predict the repo rate because it’s exceptionally low; there’ve been rules changed and household behaviors have changed,” said Jesper Hansson, deputy head of the Riksbank’s monetary policy department, in an interview. “We have made significant forecasting errors in the last few years.”
Still, Hansson says the bank has taken account of the growth in adjustable-rate mortgages in its predictions.
Economists who track the bank say its forecasts can be unreliable. “You can’t trust it,” said Stefan Hoernell, senior economist at Svenska Handelsbanken AB in Stockholm. “The market doesn’t follow it slavishly.”
Hoernell, who says he has been more accurate in predicting the Riksbank’s rate decisions over the last two years than the bank itself, expects policy makers to end their tightening cycle with the benchmark at 3 percent. Danske Bank’s Grahn also expects the benchmark to peak at 3 percent or lower, about a percentage point lower than the bank is forecasting.
‘Cardinal Mistakes’
“I have a similar feeling to the one I had in 2008, when the Riksbank made some cardinal mistakes by raising in July and September, just two weeks before” the collapse of Lehman Brothers Holdings Inc., said Par Magnusson, chief Nordic economist at Royal Bank of Scotland Group Plc, in an interview. “There is a certain weakening of the housing market and a far too weak inflation, and still they hike.”
The Riksbank increased its benchmark a quarter point to 4.75 percent on Sept. 4, 2008, 11 days before Lehman Brothers failed.
The Riksbank may also need to adjust its rate outlook as higher household debts make consumers more sensitive to its policy moves, Grahn said. Consumer debt rose to 167 percent of disposable incomes in December 2009 from 104 percent a decade earlier, central bank data show. Lending to households has risen 10.9 percent a month on average since August 2004.
Pressure to raise borrowing costs may also fade after the Financial Supervisory Authority on July 9 said it will cap mortgage loans at 85 percent of the value of a property, starting Oct. 1. That reduces the need to use monetary policy to steer the property market, according to Magnusson.
Debt Burden
He estimates the 20 percent of mortgage borrowers with the highest debt have obligations four to 46 times their disposable incomes. Adjusting for the 1 percent with the highest debt levels, borrowers owe as much as 13 times their incomes.
Apartment prices in June declined for the second time in 11 months, slipping 0.2 percent from May, according to real-estate researcher Maeklarstatistik, which bases its calculations on three-month moving averages.
The Riksbank, which targets 2 percent inflation, risks plunging the economy into a deflationary spiral if it sticks to its tightening path, Magnusson says. Swedish price growth, which has lagged behind the Riksbank’s target since December 2008, was 1.1 percent in July, Statistics Sweden said yesterday. The economy’s 5.1 percent contraction last year brought with it eight months of deflation through November.
“It’s difficult to forecast a correct correlation between the rate, demand and inflation, since it changes so much over time,” Hansson said. “To find a stable correlation, it needs to stay the same for 10 to 20 years. That’s not easy.”
Hamper Growth
The bank said last month that while “inflationary pressures are currently low,” they are “expected to increase as economic activity strengthens.”
Policy makers need to err on the side of loose policy as they lack adequate tools to fight deflation, Magnusson said in a July 19 interview.
Fiscal tightening across Europe will also hamper Swedish growth in 2011 and 2012 since exports make up about half of the country’s output, said Robert Bergqvist, chief economist at SEB AB in Stockholm. About three quarters of Swedish exports go to European markets.
Sweden’s economy will grow 3.8 percent this year and 3.6 percent in 2011, the Riksbank estimates. Unemployment will peak at an average 8.9 percent this year and slip to 8.5 percent in 2011. The bank expects inflation to average 1.2 percent this year and 2 percent in 2011.
The country’s labor market will only improve slowly, Bergqvist said. “There are probably reasons for households to keep a tighter grip on their wallets.”
To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.
Rate These Stories
Rate this Page