Swedes in Household Debt Binge Seen Provoking Policy Slap

Three weeks after Sweden’s central bank delivered a surprise half-point rate cut, a fresh set of credit data showed that households are borrowing at the fastest pace in almost three years.

The Swedish Financial Supervisory Authority and the government “have concluded that the higher credit growth and the high household indebtedness is problematic,” Mats Hyden, an economist at Nordea Bank AB, said by phone. Last week’s credit report “increases the pressure on them to act.”

While the Riksbank fights back criticism from Nobel laureates and former members of its own board that it was too slow to tackle disinflation with rate cuts, households are piling on more debt. Consumer borrowing is at a record high with homeowners owing their creditors 370 percent of disposable incomes, the central bank estimates.

“Credit growth has changed course and is now on an upwards trend,” Hyden said. “And the fact that it increased already in June, before the Riksbank’s rate cut, indicates that there is more momentum in credit growth than previously thought.”

Disappointing Outcome

Credit grew at an annual rate of 5.4 percent in June, the quickest pace since November 2011, Statistics Sweden said on Friday. The news sent the krona 0.4 percent higher against the euro to its strongest since July 3, the day the Riksbank said it was cutting its repo rate to 0.25 percent from 0.75 percent to try to drive inflation closer to its 2 percent target. Prices rose at one tenth that pace in June.

Total private debt in Sweden, including households with no loans, stood at about 173 percent of disposable incomes in the second quarter of this year, according to the Riksbank, which forecasts that that ratio will rise to 185 percent in 2017.

Sweden has already sought to tighten its macroprudential framework to free the central bank to focus more on inflation. Still, the central bank says the Financial Stability Council created to keep an eye on debt growth hasn’t done enough.

“One cannot escape the fact that the results of the council’s meeting in May were meager and disappointing,” Riksbank Deputy Governor Per Jansson said, according to the minutes of the bank’s July 2 rate meeting.

That means debt may be poised to grow further. The nation’s biggest banks have already started cutting mortgage rates, while deposit rates close to zero mean households have little incentive to save.

Debt Growth

“While we have no exact forecasts, we do believe that credit growth will tick up a bit from the current level,” Hyden at Nordea said.

Measures such as raising the risk weights that Nordea Bank AB, Svenska Handelsbanken AB, Swedbank AB and SEB AB must apply to their mortgage assets, as well as stricter amortization rules, have so far had a limited effect on credit growth.

SEB Chief Executive Officer Annika Falkengren said at a press conference on July 14 she wants banks to foster a stronger amortization culture among Swedes “as money will probably never be as cheap as today.” As chairman of the Swedish Bankers’ Association, Falkengren is leading talks with other banks in the country about lowering the threshold at which households are required to amortize, she said in an interview this month.