OECD Warns Riksbank Against Obsessing Over Record Debt

The Riksbank should stop worrying about Sweden’s record private debt load and could do more to support economic growth, said Pier Carlo Padoan, chief economist at the Organization for Economic Cooperation and Development.

“We’re not tremendously concerned about household debt,” Padoan, who’s also deputy secretary-general of the Paris-based group comprising the world’s developed economies, said in a Dec. 2 interview in Stockholm. “There’s not really a risk of a bubble. I don’t think that cutting rates by itself would send debt higher, would signal that there are easier monetary and financing conditions.”

The Riksbank has come under pressure to lower rates as the $540 billion economy grapples with slack export demand and after consumer prices unexpectedly declined in October. Policy makers are struggling to bring inflation closer to the bank’s 2 percent target without stoking an overheated housing market. Inflation, excluding mortgage costs, has been below target for almost three years.

Consumer prices will rise 0.1 percent this year and 1 percent in 2014, the OECD forecast last month. Economic growth will slow to 0.7 percent this year from 1.3 percent in 2012, before picking up to 2.3 percent in 2014, the OECD said. Gross domestic product in the Nordic region’s largest economy grew 0.1 percent in the three months through September, Statistics Sweden said last week. That missed the 0.5 percent estimate in a Bloomberg survey.

Benefit Economy

“You could have a more expansionary, or an expansionary, monetary policy stance which benefits the whole economy” coupled with “specific macro prudential measures targeting the housing market and mortgages in a way that there is no excessive lending there,” Padoan said.

According to Swedish central bank forecasts, average household debt will rise to a record 177.4 percent in the fourth quarter of 2015 after having almost doubled since the mid-1990s. Apartment prices, which have more than doubled since 2000, increased 14 percent in the 12 months through October.

Sweden’s krona rallied yesterday after two Riksbank deputy governors signaled they weren’t prepared to cut rates as they instead focus on containing private debt.

‘Incredibly Important’

“As we have made the assessment that if the repo rate is too low it will entail a risk of exaggerated household debt and inflated housing prices, monetary policy has not been quite as expansionary as it might otherwise have been,” Deputy Governor Per Jansson said in a speech. The bank has “stepped on the accelerator just enough during the recovery phase to ensure that developments are not just reasonable in the short term, but also sustainable in the longer run.”

Deputy Governor Cecilia Skingsley said yesterday policy makers will monitor financial stability as external pressures beyond the Riksbank’s control steer inflation.

Skingsley said in a speech in Stockholm that keeping financial imbalances from hurting the economy is “incredibly important” and that, while inflation is “too low,” weak demand from abroad is a “big” obstacle preventing the bank reaching its price target.

The bank announces its next rate decision on Dec. 17. Its board voted 4-2 to hold rates unchanged at its last meeting, with two other deputy governors, Karolina Ekholm and Martin Floden, calling for lower rates.

The house price level is “not something that require aggressive policy now, but it has to be monitored,” Padoan said. Sweden’s low public sector debt means “there is a buffer that can deal with problems were they to appear in the housing sector or, by implication, in the banking sector,” he said.

No Urgency

Sweden should seek to cut both household debt and the size of its banking sector, he said.

Private debt “needs to be brought down but it’s not a matter of urgency, it’s a question of a medium- to long-term strategy of stabilizing it at a lower level,” he said.

The country has taken numerous steps to try to cool its property market and rein in its banks. Measures have included capping mortgages at 85 percent of property values and tripling mortgage risk weights.

Sweden’s banks are already subject to some of the world’s strictest capital requirements and must hold at least 12 percent core Tier 1 capital of their risk-weighted assets by 2015. Nordea Bank AB, Svenska Handelsbanken AB, Swedbank AB and SEB AB already exceed that level.

With respect to Sweden’s financial industry, “there is scope for reducing its size over the medium-term but again this is not very pressing,” Padoan said.

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