If you’ve ever bought a folding futon bed from Ikea you’ll probably have been both impressed and perplexed by Scandinavian ingenuity.
It’s the same when it comes to central banking. Policy makers are looking to Sweden, Norway and Denmark for off-the-shelf measures they can build at home.
Sweden invented the central bank, establishing the Riksbank in 1668 after the public lost confidence in the paper money produced by Stockholms Banco. Bank-rescue strategies in the 1990s and efforts to improve central-bank communications through forward guidance taught lessons to first responders in the recent global financial crisis.
Now, the European Central Bank is considering copying Sweden and Denmark by charging banks to hold their money. And the Bank of England may mimic steps taken by Sweden and Norway to tame a housing boom.
They’ve drawn warnings from Michala Marcussen of Societe Generale SA that negative deposit rates and mortgage-focused regulations carry risks: “Central banks, learn from thy neighbor!” she said in a report this week.
Sweden cut its deposit rate to minus 0.25 percent in July 2009 and held it there until September 2010. Denmark followed in July 2012 until last month as it successfully prevented an appreciation in the krone from capital inflows.
Draghi is poised to go Scandinavian next month when most economists expect him to make the ECB’s deposit rate negative, in effect turning it from a payment to a fee. The idea is that banks would respond by seeking returns elsewhere through loans to companies and consumers. A decline in the euro would also be a welcome byproduct to exporters such as Airbus Group NV.
Denmark’s experience suggests reason for caution, according to Helge J. Pedersen, chief economist at Nordea Bank AB in Copenhagen. That’s because a negative deposit rate threatened bank profits, forcing them to pass the cost on to consumers. The result was that lending remained stymied.
“It’s risky to do it,” said Pedersen.
As for Carney, he’s also looking toward Scandinavia by warning rising housing prices pose the biggest risk to his economy. That may force him to introduce rules to curb mortgage lending.
Trouble is, restraints haven’t much tamed animal spirits from Stockholm to Oslo. Swedish consumer debt of homeowners has ballooned to 370 percent and apartment prices, which have almost tripled since early last decade, rose at an annual rate of 8 percent in April. In Norway, the housing market is rebounding rapidly, reversing a 6 percent drop in the last seven months of 2013.
Similar measures in the U.K. also could fall flat, yet still force up the pound and gilt yields, imposing deflationary pressure similar to the Sweden, says Marcussen, who suggests governments may need to take fiscal steps or build more houses.
The advice: assemble with care.