`Giant Wave of Money' Headed for Sweden Creates Policy Nightmare

  • 13 out 15 analysts see Riksbank key rate unchanged this week
  • Nordea says failure to expand stimulus could strengthen krona

European Central Bank President Mario Draghi said boo last week and the krona jumped.

With the ECB signaling a new wave of stimulus to prop up the euro zone, the question is how Sweden’s central bank can fight the monetary expansion coming from the south with its own, much smaller toolbox as it tries to stop the krona appreciating.

“The nightmare for the Riksbank board is maybe something like this: they are gathered in the south of Sweden, looking out over the Baltic Sea, when they see a giant wave of money coming in from the euro zone and try to fight it with a hose,” Robert Bergqvist, chief economist at SEB in Stockholm and a former researcher at the Riksbank, said by phone.

Draghi's stimulus pledge exposes Sweden's much smaller policy toolbox
Draghi's stimulus pledge exposes Sweden's much smaller policy toolbox

The Riksbank is due to announce its next rate decision on Oct. 28. Most economists surveyed by Bloomberg see the bank keeping its repo rate at minus 0.35 percent, though there’s speculation policy makers will need to expand their quantitative easing program. Failure to do so would lead to the krona strengthening “markedly,” Nordea Bank says.

Draghi’s stimulus measures to date have already forced his Swedish counterpart, Stefan Ingves, to resort to unprecedented measures to drive up consumer prices in Scandinavia’s largest economy. He cut Sweden’s main rate below zero for the first time in February and started buying bonds, expanding the QE program several times since. Underlying price growth has stayed below the Riksbank’s 2 percent target since the beginning of 2011.

Sweden is running out of options to revive inflation
Sweden is running out of options to revive inflation

The stimulus program marks a departure from the cautious approach Ingves had adopted earlier, as he argued that excessively low rates risked overheating Sweden’s already hot property market. Now, there’s a growing chorus of voices from bank executives to analysts warning of unsustainable housing price developments. But Ingves can’t afford to take his attention away from consumer prices.

“The Riksbank is fully focused on the inflation target,” Pierre Carlsson, an analyst at Handelsbanken, said by phone. “They’ve let go of the housing market, at least officially, and it’s not something that should keep them from further action. But they’re hardly happy.”

One avenue the Riksbank has turned to in an effort to shape price developments is wage growth. Last week, Sweden’s unions failed to find common ground in negotiations affecting about 3 million workers. Carlsson says that the lack of coordination may lead to faster pay growth, which could help fuel inflation. If that happens, even an extra round of ECB stimulus in December wouldn’t necessarily force the Riksbank to follow, he said.

“A lot depends on the wage discussions in Sweden,” Carlsson said.

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