Riksbank Won’t Tolerate More Price Shocks, af Jochnick Says

Sweden’s Riksbank will need to ease monetary policy further should prices continue to fall more than policy makers forecast, First Deputy Governor Kerstin af Jochnick signaled.

“At these low levels it’s important that we end up at roughly the forecasts we’ve made,” she said in an interview on April 25, after a speech in Sundsvall, Sweden. “We’ve received data which was significantly lower than our forecast, so the tolerance for even lower inflation data is pretty small.”

In an effort to ward off deflation in the largest Nordic economy, the Riksbank this month signaled greater willingness to cut rates, and delayed tightening plans until the second quarter of next year. Consumer prices, which have risen less than the bank’s 2 percent target for more than two years, sank 0.6 percent in March on an annual basis, twice as much as the Riksbank predicted. The developments prompted Nobel Laureate Paul Krugman to warn that Sweden is facing a Japanese-style deflationary trap.

Af Jochnick sided with the majority on the board, which voted 4-2 this month to keep the repo rate at 0.75 percent for a second meeting. Two members had wanted a cut to 0.5 percent. Joining Governor Stefan Ingves, af Jochnick cited concerns that more easing might fuel private debt growth after the Riksbank in December reduced rates for the first time in a year. She argued signs of an economic recovery will ultimately boost prices, according to minutes published last week.

The Upswing?

Two other Riksbank board members, Per Jansson and Cecilia Skingsley, have also indicated they would consider cutting should inflation continue to undershoot the bank’s target. Deputy governors Karolina Ekholm and Martin Floden have consistently argued in favor of lower rates than those set.

Af Jochnick said inflation readings for April and May, as well as economic growth figures for the first quarter, will determine whether she votes for a cut. The latest data showed Sweden’s gross domestic product expanded an annual 3.3 percent in the fourth quarter, beating the 1.2 percent estimated by the Riksbank.

“This upswing in the fourth quarter we think is temporary and the question then becomes how big the bounce-back becomes,” af Jochnick said. “Productivity, which was rather high in the fourth quarter, was that temporary or will it continue?”

Retail Sales

A report today showed retail sales rose an annual 5.1 percent in March, the biggest gain in three years and beating a 2.7 percent estimate in a Bloomberg survey of analysts. Sweden’s trade surplus narrowed to 2.6 billion kronor last month, as imports rose more than exports. Exports gained 1 percent in the first three months from a year earlier while imports climbed 3 percent, according to Statistics Sweden.

Keeping rates low means the government must take swift action to prevent rising house prices and record consumer debt from spiraling out of control, af Jochnick said in the interview.

The government is working on a “road map” to deal with the debt build-up, which will top the agenda of a meeting next month of Sweden’s Financial Stability Council. The group, which met for the first time this year in February, is made up of representatives from the government, the Riksbank, Sweden’s Financial Supervisory Authority and the National Debt Office.

No Doing

“Everyone is seeing that it’s a problem but no one is doing that much,” af Jochnick said. “I don’t know if there will be a road map” or “exactly what we will conclude,” she said.

Af Jochnick said the government should focus on measures to stimulate housing construction and also consider making Swedes pay down their mortgages faster. Given today’s low rates, it should also consider reducing the scope for deducting part of mortgage payments from taxes, she said.

Swedish household debt has almost doubled to more than 170 percent of disposable incomes since the mid-1990s. The development has accompanied a surge in home prices, with apartment prices more than doubling since 2000, after rising 7 percent in the last year.

“If we make it far enough so that we get a road map then we can become a bit calmer about that this won’t spiral out of control,” af Jochnick said. “We must see that things add up and that we boost inflation within our forecast horizon.”

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