Swedish Central Banker Sees Corrective Steps as Easing ShunnedJohan Carlstrom and Niklas Magnusson
Sweden’s central bank will need to compensate for keeping rates too high by delaying a planned tightening cycle as its actions keep inflation below target, Deputy Governor Martin Floden said.
What’s more, the majority on the Riksbank’s six-member board risk undermining their goal of keeping household debt in check by pursuing policies that will ultimately prevent them from raising rates next year, Floden, who joined the bank in May, said in a Sept. 24 interview.
“There are stronger reasons to cut the rate than to allow this worry about household debt to affect monetary policy,” Floden said. “It would be better to cut the rate now so that we move quicker toward the inflation target and can raise rates faster, than we would have if we don’t cut the rate.”
The Riksbank kept its repo rate at 1 percent this month, in part to avoid fueling household debt. At the same time, inflation has trailed the bank’s 2 percent target for 20 months. Floden, who taught at Stockholm University before joining the bank, and fellow economics professor Deputy Governor Karolina Ekholm had backed a cut to 0.75 percent to help the bank reach its price goal. The Riksbank said it plans to raise rates late next year.
“I agree with the majority’s view that the repo rate should be raised starting late next year but it’s conditioned on that the rate is cut today,” Floden said. “My view is that if we don’t cut the rate today, we will probably have to keep rates low for a longer time period.”
The Riksbank has struggled to balance policy to spur a recovery and reach its inflation target without fueling household debt. Apartment prices have more than doubled since 2000, sparking concern a bubble may be brewing. The Riksbank predicts private debt will grow to 177 percent of disposable incomes in 2015 from 171 percent at the start of this year.
“I’m not so sure the level of household debt is worrying,” Floden said. “It’s mainly about getting the development under control. We have a high savings rate even if you take out wealth related to houses and apartment assets savings is pretty high and it has risen at least as much as indebtedness.”
The focus on private debt has sparked debate in Sweden, with Deputy Governor Lars E.O. Svensson ending his term earlier this year after criticizing the bank’s failure to meet the inflation target. Svensson, a former colleague of Federal Reserve Chairman Ben S. Bernanke, argued it’s not the role of a central bank to focus on the housing market. He warned in June last year that higher rates in Sweden than elsewhere were feeding imbalances by forcing local banks to seek foreign funding.
Riksbank Deputy Governor Per Jansson this week joined calls from Governor Stefan Ingves and Deputy Governor Cecilia Skingsley that the Riksbank continue to monitor debt even as the government steps up efforts to prevent a bubble.
“A cut by 25 basis points during, let’s say, a year or even by 50 basis points, would have a very small effect on household debt,” Floden said. “We could cut more than 25 basis points and there’s a case to do that and then increase the rate even quicker than if we only cut it by 25 basis points. But I’m worried about that it will be perceived as too dramatic to argue for more than 25 basis points. We’re not at a point where we want to send dramatic signals.”
Sweden has taken multiple steps to limit credit growth, including capping mortgages at 85 percent of a property’s value in 2010 and raising risk weights on mortgage assets to 15 percent this year from as low as 5 percent and. Floden and Jansson this week backed calls from Ingves and Skingsley to raise mortgage risk weights further, arguing they should more than double to 35 percent to safeguard financial stability.
The Swedish Financial Supervisory Authority has told banks to hold at least 12 percent core Tier 1 capital of their risk-weighted assets by 2015, compared with a 7 percent minimum and 2019 deadline set by the Basel committee. The government this month chose the watchdog over the Riksbank to decide the size of a countercyclical buffer that varies with the credit cycle and that will be placed on top of core Tier 1 capital requirements.
“In the long term, banks could very well have even higher capital requirements and the levels we’re talking about now are not very high if you want to give the financial system the right incentives to make sound risk assessments,” Floden said. It’s important to raise them at the right time to avoid choking a recovery from the current economic slump, he said.
The regulatory toolbox “looks very promising,” Floden said. “I don’t see any need for more instruments at the moment.”