As central bankers in Sweden and Norway look for ways to fight consumer debt bubbles without losing sight of their inflation mandates, the latest regulatory onslaught is helping ease their dilemma.
Sweden’s Riksbank this week cut its main interest rate, while Norges Bank a day later stuck to a plan to shelve tightening until March next year at the earliest. Yet both central banks have warned of the risk of household debt growth destabilizing their economies, signaling a need for higher rates even as inflation hovers well below their targets.
“We have expressed a clear view of a need for stricter requirements and stricter rules in this area,” Norway central bank Governor Oeystein Olsen said in an interview in Oslo today. “If that evolves, that has a consequence for the conduct of monetary policy.”
The banks’ dilemma has spurred debate on the extent to which monetary policy should target asset bubbles, or whether interest rates are too blunt a tool to steer property values and debt growth. Now, Sweden and Norway are attacking credit growth via stricter regulation. Central banks are also being drawn deeper into the regulatory process, allowing them to address imbalances without compromising their rate policy.
“There is a necessity for a common analytical background,” Jan F. Qvigstad, the deputy governor of Norway’s central bank, said in an interview yesterday. “In that sense it will make it easier because we have two jobs to advise on macro prudential measures and set interest rates.”
Norges Bank, which yesterday left its main rate at 1.5 percent, will start advising the Finance Ministry on how much extra capital banks need to hold in their counter-cyclical buffers. That follows its proposal to triple minimum risk weights on banks’ mortgage assets to 35 percent. A separate recommendation also seeks to limit the use of covered bonds.
“All parties have a lot to learn in the area of financial stability and transmission mechanisms and impacts,” Olsen said.
Norway’s efforts to curb credit growth by way of regulatory controls “will take away some pressure from monetary policy in relation to potential financial imbalances,” said Erica Blomgren, chief strategist at SEB AB in Oslo.
In Sweden, the country’s four biggest banks need to meet stricter capital requirements than lenders elsewhere. Sweden’s financial regulator is also pushing for risk weights on mortgage assets to be tripled to 15 percent.
The monetary policy relief provided by the extra regulatory measures would allow central bankers in the two countries to turn their attention to chronic below-target inflation.
Sweden’s central bank on Dec. 18 said consumer price growth will average only 0.3 percent in 2013, falling well short of its 2 percent target. In Norway, headline inflation held at 1.1 percent last month, and has remained below the central bank’s 2.5 percent target since January last year.
Though inflation pressures have been hard to identify, growing private debt burdens have tied central bankers’ hands. In Norway, the world’s fourth-richest nation per capita, household debt will swell to more than 200 percent of disposable incomes next year, while Sweden’s debt load hit a record 173 percent this year, the countries’ central banks estimate.
“It should, over time, give more freedom for the Riksbank to set the repo rate more according to monetary policy conditions, rather than financial stability conditions,” said Michael Grahn, a fixed-income strategist at Danske Bank A/S in Stockholm. In the current economic climate, that would create “more room for cuts,” he said. Still, the changes will take time to implement and the Riksbank will tread cautiously, he said.
Swedish central bank Governor Stefan Ingves, who is also the chairman of the Basel Committee on Banking Supervision, has argued in favor of central banks tracking risks associated with household indebtedness. Still, interest rates may not be the best tool for the job, he said, after his bank cut its main rate a quarter point to 1 percent this week.
“If we can’t do it because here monetary policy is a blunt instrument then others will have to do other things,” Ingves said in an interview. Imbalances can be eased “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,” he said.