Sweden’s central bank will need to be vigilant for years to come to ensure household debt burdens “way above” levels elsewhere don’t destabilize the largest Nordic economy, GovernorStefan Ingves said.
“It’s very, very important to ensure that debt doesn’t go up,” Ingves said in response to questions in Stockholm yesterday. “We’re going to have to keep a very, very close eye on that side, probably for several years to come.”
Though Ingves, who is also the chairman of the Basel Committee on Banking Supervision, has repeatedly warned against keeping rates low too long, his bank yesterday cut its main rate for a fourth time in a year to protect Sweden from Europe’s debt crisis. The decision followed reports of mass job cuts as manufacturers adjust to shrinking markets in Europe, where Sweden sends about 70 percent of its exports.
It was “general economic conditions” that drove the decision to cut, Ingves said. “That was what really mattered this time, and the fact that inflation is below our target.”
The central bank cut its forecasts for 2013 and now sees gross domestic product expanding 1.2 percent, compared with an October estimate for 1.8 percent. Unemployment will average 8.1 percent next year, versus a previous prediction for 7.9 percent, it said. Headline inflation will slow to 0.3 percent this year, versus the bank’s targeted 2 percent, it said.
That doesn’t mean the central bank is any less concerned about credit growth, Ingves said. Household debt has risen to a record 173 percent of disposable incomes this year from 90 percent in the mid-1990s to finance rising property prices. It will stay largely unchanged at 174 percent next year if the central bank sticks to its forecast of no more rate cuts, the Riksbank said yesterday.
“That’s way above many other countries and many other countries have ended up having great difficulties,” Ingves said. “In the end it takes a value judgment I have said it wouldn’t be good if we went above 200 percent.”
The krona surged 0.7 percent against the dollar to 6.5578 as of 11 a.m. in Stockholm. Versus the euro it gained 0.4 percent to 8.7018, making it today’s best-performing major currency tracked by Bloomberg. The yield on Sweden’s benchmark 10-year bond rose three basis points to 1.59 percent.
Sweden’s financial regulator and banks also need to play a part in helping to keep debt from spiraling out of control since monetary policy is a “blunt instrument,” he said.
Stockholm-based Nordea Bank AB (NDA), Swedbank AB (SWEDA), SEB AB and Svenska Handelsbanken AB (SHBA) need to meet stricter capital requirements than those set under Basel III. Sweden’s banks also face higher risk-weight requirements on their mortgage assets to counter unsustainable private debt growth.
The regulator has also urged banks to require more amortizations on mortgages after the financial watchdog in October 2010 capped borrowing at 85 percent of the value of a property.
“If we can’t do it because here monetary policy is a blunt instrument then others will have to do other things by increasing capital charges on banks, by keeping a close eye on the loan-to-value ratio, maybe look more into loan-to-income and issues of that nature,” Ingves said.
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