Riksbank Burns Option to Cut After Ingves Gambit: Nordic Credit

Swedish Riksbank Governor Stefan Ingves
Swedish Riksbank Governor Stefan Ingves, who is also the chairman of the Basel Committee on Banking Supervision, signaled he’s less concerned about rising unemployment than he is about imbalances fueled by credit growth. Photographer: Linus Hook/Bloomberg

Swedish Riksbank Governor Stefan Ingves has tied the bank’s hands after publishing an opinion piece that rules out an interest rate cut even as unions and economists argue more easing is needed.

Ingves, who is also the chairman of the Basel Committee on Banking Supervision, signaled he’s less concerned about rising unemployment than he is about imbalances fueled by credit growth. The comments, published Oct. 18 in an opinion piece in newspaper Svenska Dagbladet, sent the krona up the most in a month against the euro and the dollar, and prompted traders to pare back bets the Riksbank may cut rates. The bank’s six-member board, which Ingves heads, meets today and announces its decision tomorrow.

“Ingves has put himself in a very weird corner,” Par Magnusson, chief Scandinavian rates strategist at Royal Bank of Scotland Group Plc in Stockholm, said by phone. “If they publish this type of an opinion piece a week before the decision and still cut the rate, they will have completely confused the market.”

Sixteen of the nineteen economists surveyed by Bloomberg predict the bank will leave its benchmark repo rate at 1.25 percent, after lowering it three times since December. Three predict a cut to 1 percent.

Index Swaps

The day before Ingves’ comments were published, overnight index swaps showed a 22 percent probability of a rate cut this week. The swaps showed zero likelihood of a cut the day his piece ran, and are now indicating a 7 percent probability of a quarter-point rate reduction. Futures on the Riksbank rate are trading at 0.94 percent in March, indicating a rate cut by then.

“We changed our view following Ingves’ gambit,” said Michael Grahn, an analyst at Danske Bank A/S in Stockholm. “It gives a signal that the board will put a lot of emphasis on household indebtedness.” Danske expects the Riksbank to wait with its next rate cut until December, he said.

The yield on Sweden’s 6.75 percent note due May 2014 eased four basis point to 0.722 percent. The yield on the 10-year note sank four basis points to 1.59 percent, bringing the spread to similar-maturity German bunds to one basis point.

“Today’s high unemployment is a problem, but as Riksbank Governor I can’t just act short-term,” Ingves said in the opinion piece. “If the Riksbank doesn’t take into account indebtedness of households and companies it could have very serious consequences.”

Job Losses

Meanwhile some of Sweden’s biggest trade unions are pleading for monetary easing. IF Metall, a blue-collar union with 350,000 members, forecasts unemployment will rise to an average rate of 8 percent in 2013. The Riksbank’s latest estimate is for joblessness of 7.6 percent for this year and next.

Manufacturing confidence sank for a third month in October, with an indicator gauging sentiment in the industry showing minus 16, versus minus 11 last month, the National Institute of Economic Research said today. The krona lost 0.2 percent against the euro and traded at 8.6528 as of 10:54 a.m. local time.

Two of the Riksbank’s six board members have argued in favor of deeper cuts. Deputy Governor Karolina Ekholm said in an interview last week that Ingves’ comments don’t represent the whole board. Deputy Governor Lars E.O. Svensson has gone so far as to criticize the bank for policy moves he says damaged Sweden’s recovery and kept unemployment too high.

In September last year, Svensson 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.


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. About 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 job cuts to stay competitive. Sweden’s biggest phone company TeliaSonera AB last week said it will eliminate 2,000 jobs as growth stalls. Truckmaker Volvo AB, papermaker Holmen AB and 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.

Yet economic data overall point more toward a cut than to unchanged rates, Hallberg at Swedbank said. Ingves’ remarks, though poorly timed, don’t mark a departure from the Governor’s stance on credit risks, he said.

Hurdle Raised

While the article “raises the hurdle for rate cuts,” it “should not be interpreted as a monetary policy signal, but a contribution to a debate that’s been going on for quite a while,” Hallberg said.

The last time Ingves pushed through tighter policy than half his board voted for was in September 2008, when he raised the repo rate to 4.75 percent. The move, which came less than two weeks before the collapse of Lehman Brothers Holdings Inc., was following by a cycle of six cuts that started the following month.

Sweden’s economy is now struggling to survive a manufacturing decline as its European export markets sink into recession. Swedish unemployment rose to 7.4 percent last month from 7.2 percent in August, Statistics Sweden said on Oct. 18. That means that Ingves will ultimately need to accept more cuts, according to Hallberg at Swedbank.

“The macro picture has very clearly worsened during the autumn,” he said.

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