The International Monetary Fund backed the majority of the Swedish central bank in its stance of keeping interest rates unchanged to protect financial stability amid growing criticism over a failure to keep up inflation.
“Macroprudential policy should be the first line of defense, but with high and increasing household debt, monetary policy may have to ‘lean against the wind’ and follow a less supportive policy course than warranted by short-term macroeconomic conditions alone,” the IMF said in a report.
The Riksbank has come under criticism as consumer price growth stayed below its price target for more than two years. The bank has been reluctant to reduce rates amid concern that doing so would fuel record household debt burdens even as unemployment has hovered above 8 percent.
The IMF said it “would be justified” to cut interest rates should inflation expectations decline further “significantly” below the central bank’s 2 percent target, while warning that doing so would “add greater urgency” to implementing “effective macroprudential measures.”
While Sweden has taken action to try to cool a build-up in household debt and housing prices, including capping mortgages at 85 percent of property values and raising capital requirements for banks, prices and debt levels keep rising.
Household lending growth accelerated to 5.2 percent in April from 5.1 percent in March and a level of 4.5 percent in January 2013. Apartment prices rose an annual 8 percent in April while prices for single-family homes gained 6 percent, according to data from Svensk Maeklarstatistik AB.
The IMF said Sweden must target credit demand to address “urgent macroprudential and structural policy challenges” amid “increasing concern” about financial stability. It also said that “alleviating housing market supply constraints would address an important underlying factor behind the rise in residential property prices especially in urban areas.”
Sweden should consider a binding maximum amortization period for new home loans, a debt service-to-income limit as well as a reduction in the loan-to-value cap to 75 percent from 85 percent, it said. The government should gradually reduce tax deductions of mortgage interest and reform the property tax, according to the IMF.
“To stem the increase in already high levels of household debt, moving beyond credit supply measures to directly contain mortgage demand is a priority,” the IMF said. “This will help free the Riksbank to pursue its inflation target with less concern about financial stability risks.”
The Riksbank in April signaled greater willingness to cut rates and delayed tightening plans until the second quarter of next year. December futures on its repo rate trade at 0.47 percent, signaling traders anticipate at least one reduction in the 0.75 percent benchmark rate. Policy makers meet again next month. The IMF, which sees Sweden’s economy growing 2.6 percent this year, forecasts inflation at about 1.5 percent in 2015.
The Swedish Financial Supervisory Authority yesterday warned that household debt is one of the greatest risks to financial stability and opened for some of the measures proposed by the IMF. While the actions taken by policy makers are sufficient for now, the regulator said it will consider further measures if the situation worsens.
“If such a situation would arise, the FSA regards it as most efficient to address households’ ability and willingness to take on debt, for example through amortization requirements, limits on loan amounts, interest rate payments in relation to income or a sharpening of the mortgage cap,” it said.