Sweden’s central bank could face credibility issues since it lacks the tools besides its benchmark rate to contain potential financial imbalances, Governor Stefan Ingves said.
While an “ambition” to hold the credit cycle in balance may require a slightly higher policy rate, it could also damp the economic cycle and cause inflation to undershoot the target, which may be “normal and acceptable” for a period of time, Ingves said today in the text of speech in Stockholm.
“But if the period becomes prolonged, it may sooner or later become difficult to gain understanding and support for this policy -- despite its purpose being to prevent a much worse development further ahead,” he said. “This is a dilemma.”
After leaving its main rate at 1 percent last month, the Riksbank is signaling it will tighten late next year as growth in the largest Nordic economy accelerates. The Riksbank has struggled to balance policy to spur a recovery and reach its inflation target without fueling debt growth.
The government in August proposed a package of measures aimed at strengthening banking stability, including giving the Financial Supervisory Authority more tools and putting the regulator in charge of oversight.
Ingves, who had argued the central bank should be in charge of macroprudential oversight, said the “most important thing” is that the uncertainty of who would be in charge has now been resolved.
He said that questions still remain, including on “clarifying the relationship between macroprudential policy and monetary policy.”
“I’m convinced that we will succeed in this task, with joint efforts and as we gain greater knowledge of how the new framework for macroprudential policy functions in practice,” he said.
Policy makers in Scandinavia have pushed ahead of the rest of Europe to contain bank industry risks. The FSA in Stockholm has taken steps to limit credit growth, including capping mortgages at 85 percent of a property’s value in 2010 and this year raising risk weights on mortgage assets to 15 percent from as low as 5 percent.
The bank estimates household debt will grow to 177 percent of disposable incomes in 2015 after almost doubling since the mid-1990s. Ingves, who’s also the chairman of the Basel Committee on Banking Supervision, said last month the bank should continue to monitor debt even though inflation has stayed below target for 20 months.
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