Riksbank Discussion of Household Debt Boosts Sweden’s Krona

Sweden’s Riksbank is increasingly concerned that mounting household debt risks harming the economy, turning its focus away from the krona’s strength, minutes of its last meeting showed. The currency appreciated.

“The discussion turned to the high level of debt among Swedish households, both from an international and a historical perspective, which was considered to make the economy more vulnerable to shocks,” the Stockholm-based central bank said in a statement published today on its website. “Households have had a good development in income, which has led to increased consumption and rising house prices.”

The krona rose the most in almost two weeks against the euro, adding 0.6 percent to 8.6703 as of 5:28 p.m. in London. Against the dollar, it appreciated 1.2 percent to 6.5978 and reached 6.5774, the strongest level since June 21.

Sweden’s central bank on July 2 decided to keep its main lending rate at a two-year low of 1 percent for at least another year. The Riksbank is seeking to support the export-reliant economy hurt by weak demand from the 17 euro-area nations that are struggling to emerge from the bloc’s longest recession since the introduction of the single currency.

The central bank decided against cutting the repo rate, citing risks stemming from record-high household debt. A cut would have been its fifth since December 2011. The board had discussed the impact of the strong krona in pushing down the inflation rate in its April meeting.

Cut Unlikely

“If anything the discussion over household debt has risen to greater prominence of late and the minutes convey the impression that it remains unlikely in the absence of a sizable shock that the board will move toward another cut in the policy rate,” David Tinsley, chief U.K. economist at BNP Paribas SA, said in a note to clients.

Even as Riksbank Governor Stefan Ingves “would really like to see more investment in the housing and business sectors, he didn’t wish to further fuel household indebtedness,” according to the central bank. Ingves said that with only one interest-rate level, it’s difficult for monetary policy to manage this type of fine tuning, the Riksbank said.

Two of six board members, Karolina Ekholm and newly elected Martin Floden, pushed for a cut to 0.75 percent to boost growth and reduce unemployment.

Rising household debt, which has been raised as a risk factor by the International Monetary Fund, the European Commission and the Organization for Economic Cooperation and Development, hasn’t been shown to be central to monetary policy, Floden said, according to the minutes.

Curbing Debt

The IMF recommended in May that Sweden find more measures to limit house price gains and a build-up in debt, including raising risk-weights on mortgages to 35 percent from 15 percent. It should also consider imposing minimum amortization rules, pare tax deductions for mortgages and promote polices that boost housing supply, the IMF said.

Swedish companies including Ericsson AB, the world’s largest maker of wireless networks, have cut staff because of falling demand from abroad. Sweden exports about half of its $540 billion output, and about 70 percent of its foreign sales take place in Europe.

The Riksbank this month forecast consumer prices will rise 0.1 percent this year and 1.3 percent in 2014 as the economy grows 1.5 percent and 2.8 percent, respectively. Household debt will rise to about 176 percent by 2015 after almost doubling since the mid-1990s.

“Risks associated with household indebtedness may become particularly serious if the households have unrealistically low expectations of the repo rate,” Deputy Governor Per Jansson said, according to the Riksbank.

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