Housing Bubbles Upend Central Bankers’ Rate Plans: Nordic CreditSaleha Mohsin and Johan Carlstrom
Central bankers in Sweden and Norway are finding their efforts to steer inflation are being disrupted by a persistent threat of housing bubbles.
While policy makers in both countries will keep interest rates unchanged tomorrow, according to economists surveyed by Bloomberg, distortions in the two nations’ property markets are adding a layer of uncertainty to outlooks.
In Sweden, the largest Nordic economy, a brief lull in the housing market after a series of measures to curb demand has been replaced by accelerating prices. Apartment prices rose 14 percent in the 12 months through August after more than doubling since 2000. That’s prompted Swedes to take on bigger mortgages to help finance their homes, driving debt relative to disposable incomes to a record high. Riksbank Governor Stefan Ingves has repeatedly sounded the alarm and says the central bank needs to use rates to help Sweden avert a property bubble.
Things have “developed relatively strongly in Sweden,” said Henrik Erikson, chief economist in Stockholm at Nykredit Markets, a unit of Europe’s biggest issuer of mortgage-backed covered bonds. He says that the Riksbank may raise rates as early as April, compared with the bank’s official target of late next year.
Forward rates indicate traders see only a small chance of tightening earlier than the Riksbank is signaling. The June 2014 three-month forward rate agreement, which settles to the Stockholm interbank offered rate, traded as high as 1.335 percent yesterday. Three-month Stibor was fixed at 1.212 percent yesterday.
The Riksbank, which is due to announce its rate decision tomorrow at 9.30 a.m. in Stockholm, is unlikely to be swayed by economic weakness outside Sweden, Erikson said. All 17 economists surveyed by Bloomberg expect the Riksbank to keep its main repo rate at 1 percent tomorrow. The bank also will publish its rate path, showing future assumptions on borrowing costs.
“There’s been quite a lot of turbulence abroad but that’s not something that I think the Riksbank will make too big of a deal out of,” Erikson said.
The Riksbank is signaling it will raise rates even as inflation remains well below its 2 percent target. Consumer prices rose 0.1 percent in September from a year earlier, having stalled at the pace since July. In the three months through June, Sweden suffered a bout of deflation.
In neighboring Norway, things are moving in the opposite direction and the housing market is already showing signs of deflating. And with household debt at an all-time high of 200 percent of disposable incomes, the central bank may need to rethink its plan to start raising rates next year.
“The housing market is clearly in a weaker state, so I don’t see any need for a rate hike next year,” said Erik Bruce, a senior economist in Oslo at Nordea Bank AB, Scandinavia’s biggest lender. Nordea says Norway’s central bank won’t be able to raise rates until the second half of 2015, compared with the bank’s forecast for the summer. “We see a slowdown in the economy.”
Norway’s September 2014 three-month forward rate agreement eased to 1.875 percent yesterday, according to data compiled by Bloomberg. The June contract fell to 1.795 percent from as high as 1.995 percent last month.
Of the 17 economists surveyed by Bloomberg, all but one expect Norway’s central bank to keep its main deposit rate at 1.5 percent tomorrow. The bank announces its decision at 10 a.m. in Oslo. One economist predicts a cut to 1.25 percent.
House price growth in Norway slowed to 2.6 percent in September, the smallest increase since June 2009. A central bank survey released last week showed lenders saw less credit demand from households in the third quarter with demand seen dropping this quarter.
Norges Bank last month kept rates unchanged for a ninth meeting as policy makers calibrate decisions to address an overheated property market without fueling krone appreciation.
Meanwhile inflation has exceeded the central bank’s 2.5 percent target since July. Consumer prices rose 2.8 percent in September from a year earlier, the statistics office said on Oct. 10.
Erica Blomgren, chief strategist in Oslo at SEB AB, says regulatory efforts to cool the housing markets of Sweden and Norway will give both central banks more leeway to refocus policy.
“From an economic point of view, the Riksbank should have room to support the economy further as unemployment is high, inflationary pressure subdued and growth is well below trend -- only uncomfortably high credit growth is arguing against lower rates,” she said. “Norway, on the other hand, is running a very stimulative monetary policy relative to the economy.”