Riksbank Abandons Debt Fight as Ingves Overruled on Rates

Sweden’s central bank left containing the consumer debt boom to the government after policy makers made the biggest cut in interest rates since 2009, overruling Governor Stefan Ingves who pushed for a smaller reduction.

The Riksbank lowered its main interest rate by half a percentage point to 0.25 percent, matching a record low from 2010, and predicted no increases until the end of next year. The deposit rate went to minus 0.5 percent, a month after the European Central Bank cut its equivalent below zero.

Ingves, who advocated a quarter-point cut, was on the losing side of a 4-2 vote as other board members acted to shield the largest Nordic economy from the threat of falling prices. Policy makers, led by Ingves, have been reluctant to lower borrowing costs amid concern it would fuel further growth in record household debt and surging home prices.

“What will this mean for the housing-price market?” Knut Hallberg, an analyst at Swedbank AB, said by phone. “It will go bananas with a big boost to home prices.”

With rates back to levels last seen during the financial crisis, the central bank said it’s now up the government and the regulator to deal with the fallout of the borrowing binge. Property prices have almost tripled since 1995 while consumer debt has almost doubled to a record 175 percent of disposable incomes. Danes owe more than 300 percent and Norwegians about double.

Inflation Expectations

Well-anchored inflation expectations are “incredibly central,” Deputy Governor Cecilia Skingsley said in a speech today in Visby, Sweden. It’s now even more important for the government to take responsibility for debt growth, she said.

Swedes have already responded to the prospect of lower rates. They raised their use of variable-rate mortgages -- defined by the Financial Supervisory Authority as risky -- to 77 percent of new loans in June. The ratio was 63 percent in 2012, according to data from state-owned lender SBAB.

Swedbank, Sweden’s biggest mortgage lender, cut its three-month mortgage rate by 0.10 percentage point to 2.59 percent yesterday. Svenska Handelsbanken AB, the second-biggest, lowered its three-month rate by 0.05 percentage point to 2.61 percent.

More Urgent

Ingves’ action shows that he “doesn’t really want to let go of this whole household debt thing,” said Robert Bergqvist, chief economist at SEB AB. “When the Riksbank now does its part to reach the inflation target it’s very important that our politicians, our authorities do their part,” he said.

The government has been increasing capital requirements for its banks, capped loan-to-value ratios and are pondering how to make more Swedes amortize on their mortgages. Sweden’s financial industry is one of the biggest in Europe relative to gross domestic product, with assets equivalent to four times the $560 billion economy. That’s left Swedes more vulnerable than most to bank crises.

The Riksbank said yesterday that need for action has become more urgent now and that regulators should take aim directly at consumers.

The measures so far have been “good” and “strengthen the Swedish bank system but they haven’t affected the debt increases in any big way,” Ingves told reporters. “They will also need to focus on measures that affect households more directly” such as forced mortgage amortization, limiting mortgage tax deduction and lowering an 85 percent mortgage cap in place since 2010.

‘Too Late’

The bank has faced criticism and split internally over how to address its dual policy concerns. Nobel laureate Paul Krugman have been among those lambasting the bank and in April described its policy as an example of “sadomonetarism” that was creating a deflationary spiral. Lars E. O. Svensson resigned from the Riksbank board last year after failing to convince the majority to focus more on inflation and unemployment.

“Good to cut -- but much too late,” Svensson said on Twitter yesterday.

Advocates of reducing rates have argued that bringing up inflation will help ease consumer debt burdens.

U.S. Federal Reserve Chair Janet Yellen on July 2 said that using rates to curb financial excess “faces significant limitations” and that supervision should be “the main line of defense.” The European Central Bank kept rates unchanged yesterday after it last month eased policy and unveiled a range of measures to shield the euro area from deflation. Norway’s bank last month signaled it may lower rates to support growth.

Being Wrong

Ingves, along with First Deputy Governor Kerstin af Jochnick, also objected to the rate path and advocated a rate of 0.5 percent until 2016. It was the first time that a governor has been outvoted since the bank gained its independence.

“This will also lead to the attainment of the inflation target while at the same time taking into account the risks associated with household indebtedness to some extent,” Ingves and af Jochnick said in a statement.

State broadcaster SVT yesterday questioned Ingves at a press conference about his legacy, the failure to meet the inflation target and whether he should step down.

Ingves said he will “of course” stay on as governor and that he has “many years left at my job.”

“A lot of others have put in reservations over the years so in that respect I don’t think that this is a big, dramatic thing,” Ingves said yesterday. “It’s of course sad to have gotten things wrong but in a world that’s uncertain, when you’re working on forecasts, we know that that’s sometimes how things turn out.”

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