Swedish Central Bankers Argue on Policy Amid Unemployment

Sweden Central Bankers Fight Over Policy Basics as Jobs Lost
Jobseekers wait inside an employment center, operated by the Swedish Public Employment Office, or Arbetsformedlingen, in Stockholm. Photographer: Casper Hedberg/Bloomberg

A split at Sweden’s central bank over what poses the biggest threat to the largest Nordic economy is growing deeper.

Deputy Governor Barbro Wickman-Parak said yesterday that more rate cuts would have limited effect, arguing domestic policy can’t help when economic pain comes via exports. Deputy Governor Lars E.O. Svensson, who taught economics at Princeton University alongside Federal Reserve Chairman Ben S. Bernanke in 2001 and 2002, said in a separate interview that his bank’s failure to deliver more rate cuts is destroying Swedish jobs.

The rift follows comments by Governor Stefan Ingves last month signaling he’s more concerned about a credit-driven housing bubble than job losses. The bank a week later opted to keep its main rate at 1.25 percent, while leaving the door open for a December cut. Meanwhile, inflation in Sweden is 0.4 percent, well below the bank’s 2 percent target, and some of the country’s biggest companies are resorting to mass job cuts as their export markets contract.

Inflation “is now far below the target and unemployment is far above any reasonable estimate of a long-run sustainable rate, so the costs of the current policy is very high,” Svensson said yesterday in an interview in Oslo. “Policy has a very small effect on housing prices and indebtedness, but a substantial effect on inflation and unemployment.”

Rate Probability

The probability of a Swedish rate cut in December sank to 34 percent, down from 39 percent yesterday, overnight index swap calculations by Bloomberg show. The probability of an unchanged rate rose to 66 percent from 61 percent. The probability of a reduction to 1 percent in February was 50 percent.

While households are borrowing more to finance spending, Swedish exports are declining and companies including Ericsson AB, the world’s largest maker of wireless equipment, are cutting jobs as the European Union sinks into a recession.

Ericsson said yesterday it will cut 1,550 jobs to stay competitive. TeliaSonera AB, Sweden’s biggest phone company, said last month it will eliminate 2,000 jobs, following similar announcements from truckmaker Volvo AB, paper maker Holmen AB and steel manufacturer SSAB.

“The problem is that things have caught a snag abroad and mainly in many of our big export-areas,” Wickman-Parak said yesterday in an interview in Stockholm. “We can’t change that with monetary policy.”

Already Low

Sweden would have little to gain from another reduction in interest rates because the Nordic economy is battling an external crisis that domestic policies can’t fix, she said.

“I haven’t been inundated with demands for an even lower rate,” she said. “Everyone thinks the rate already is low and that it will stay low for a long period,” while households are “consuming decently already,” she said.

Her comments sent the krona higher. Sweden’s currency, which had traded as much as 0.2 percent weaker against the euro before Wickman-Parak spoke, rose to 0.4 percent versus the single currency. The krona continued its ascent today and traded as much as 0.2 percent higher against the euro, reaching its strongest intraday level since Oct. 2.

The six-member Riksbank board last month lowered its economic forecasts and predicted higher unemployment. Growth in the $500 billion economy will slow to 0.9 percent this year from 3.9 percent in 2011, while unemployment will rise to an average 7.9 percent next year from 7.7 percent in 2012, the bank said. Inflation won’t return to the bank’s target until March 2014, it said.

Deflation Struggle

“They ought to cut rates to ease real interest rates,” said John Zhu, an analyst at HSBC Holdings Plc in London. “Central banks on the whole generally know what to do when you get high inflation. They struggle with deflation and, of course, deflation is just about the worst thing that can happen when you have a lot of debt.”

Yet Wickman-Parak argues that the central bank’s repo rate is already “extremely low” and “would have to go very, very low to have significant effects. You should remember that we will have a negative real interest rate for several years.”

Higher central bank rates in Sweden than in the euro zone are only playing a “small” role in strengthening the currency, she said. The European Central Bank’s key rate is 0.75 percent, while the U.S. Federal Reserve’s rate hovers around zero.

Krona Stable

The krona has risen 7 percent against the euro since May after Sweden emerged as a haven from the debt crisis thanks to its relatively strong public finances. Debt as a share of gross domestic product will fall to 27.1 percent in 2016 from 38.4 percent last year, the government forecasts.

A “roughly stable“ krona and rising unit labor costs will return inflation to the central bank’s 2 percent target, Wickman-Parak said.

According to Svensson, the bank is running out of time if it is to avoid a deflationary spiral.

“There is some risk that the zero lower bound might bind in the future and that is actually a reason to lower sooner and more rather than later,” he said.

The Riksbank’s main forecast shows that Sweden’s economy probably won’t need more monetary stimulus after Governor Stefan Ingves expressed concern that cheaper credit could lead to a repeat of the country’s 1990s financial crisis.

Ingves today told a parliamentary hearing in Stockholm that the bank needs to take into account high debt levels when setting monetary policy. His comments coincided with a statistics agency report on the property market showing house prices rose 2 percent in the third quarter from the three months through June.

2013 Cuts

According to Nordea, pressure on Sweden’s housing market is less of a worry than job losses.

“We expect the Riksbank to cut by 25 basis points in December,” Nordea analysts said in a note today. “On the back of a weakening labor market and inflation persistently below target, we would not exclude further cuts next year. But if credit growth picks up, clearly the Riksbank’s board will be less eager to sanction further rate cuts.”

The bank said last month that household debt as a share of disposable income will remain largely unchanged at about 170 percent through 2015, after having risen from 90 percent in 1996, if it doesn’t cut rates further.

“It won’t primarily be indebtedness that will govern what we will do with the rate going forward but how things develop in the real economy, how things go with employment and inflation,” Wickman-Parak said. “We should keep an eye on it,” she said.

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