Disagreement over whether Swedish unemployment should guide policy instead of imbalances in the housing market is deepening a rift at the Riksbank less than a week before its six-member board decides on interest rates.
Yet far from being seen as an impediment to rate setting, the disagreement may help the bank do its job better, according to Par Magnusson, head of Scandinavian rates strategy at Royal Bank of Scotland Group Plc in Stockholm. He argues policy makers are doing society a service by embracing an open debate, instead of covering up any discord.
“It’s healthy that more and more people find out how they’re thinking,” Magnusson said by phone yesterday. “It’s good with insight into such an important societal institution.”
The bank, which is due to announce its next decision on Oct. 25, will probably leave its benchmark repo rate unchanged at 1.25 percent, overnight index swaps show. The Riksbank lowered rates by a quarter of a percentage point last month in its third cut since December, citing the effect on exports of Europe’s debt crisis and Sweden’s strong krona. Its official rate path signals borrowing costs will remain unchanged until the middle of 2013, after which the bank predicts tightening.
Riksbank board members have voiced opposing views on what should determine Sweden’s monetary policy trajectory. Deputy Governor Per Jansson has argued events in the euro zone should dominate, while Deputy Governors Karolina Ekholm and Lars E.O. Svensson have spoken in favor of deeper cuts to prevent more job losses. Meanwhile Governor Stefan Ingves has shown he’s more worried about the risk of credit-market imbalances spurred by low rates.
The exchanges have grown ever more pointed. In an opinion piece in Swedish newspaper Svenska Dagbladet, Ingves yesterday responded to “voices” that have called for the “lowering of an already very low rate” and argued that he “can’t just act in a short-term perspective.”
The comments sent the krona up the most in a month to become yesterday’s best-performing major currency against the euro, the dollar and the yen. The krona appreciated as much as 0.9 percent versus the euro and the dollar as investors scaled back bets that the Riksbank may be tempted to cut rates again. The krona gained 0.3 percent against the euro to 8.5534 as of 12:40 p.m. in Stockholm.
The yield on Sweden’s two-year note was little changed today after jumping six basis points yesterday to 0.806 percent, swelling the spread to similar-maturity German bunds to 70 basis points, the widest in a month.
Within hours, Ekholm responded that Ingves wasn’t speaking on behalf of the whole board. The views expressed were Ingves’s own, and “not the council’s,” she said in an interview in Warsaw. Ekholm and Svensson in September both entered reservations, arguing for a lower rate path.
Svensson has gone so far as to criticize the Riksbank for policy moves he says damaged Sweden’s recovery and kept unemployment higher than it needed to be. In September last year, he railed against the bank’s decision to embark on a tightening cycle that delivered seven rate increases over 12 months starting in July 2010, even as the global economic crisis continued. The bank reversed course in December last year and has cut rates three times since.
According to Magnusson at RBS, history has proven Ingves’s board members right more often than the governor himself.
Ingves’s latest comments, timed to guide markets before the bank announces rates next week, packed a “double whammy,” Magnusson said. “They will get a tightening effect both on the interest rate and currency side of things.”
The disagreement of how to deploy policy comes as Sweden shows growing signs of succumbing to Europe’s debt crisis. The $500 billion economy exports about half of its output. More than 70 percent of its sales abroad go to Europe, where countries are cutting spending to reduce debt.
Some of Sweden’s biggest companies have resorted to mass job cuts to stay competitive. Sweden’s biggest phone company TeliaSonera AB this week said it will eliminate 2,000 jobs as growth stalls. Truckmaker Volvo AB (VOLVB), papermaker Holmen AB (HOLMB), steel manufacturer SSAB have also in recent weeks said they’ll cut their workforces to adjust to sluggish markets.
At the same time, the nation’s housing market has shown signs of imbalance. Residential property prices are 20 percent overvalued, according to the National Housing Credit Guarantee Board, or BKN. Bengt Hansson, head of research at BKN, said in August that Sweden is in the grip of a housing bubble.
The financial regulator has responded by introducing stricter mortgage lending standards. Credit growth has since slowed for 22 consecutive months after borrowing was capped at 85 percent of the value of a property in October 2010.
That suggests Ingves’s timing is off, according to Magnusson at RBS.
Ingves is “behind the curve,” he said. “Credit growth has actually turned” and “we’re entering a recession.”
Unemployment rose to 7.4 percent in September from 7.2 percent a month earlier, Statistics Sweden said yesterday. Manufacturing confidence sank to its lowest last month since February, while headline inflation slowed to 0.4 percent, well below the bank’s 2 percent target.
“To in that situation say that it’s now probably time to start thinking about that we shouldn’t cut the rate to prevent a credit bubble, that timing couldn’t get any worse,” Magnusson said.
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