Overheating Seen as New Threat as Swedish Central Bank Can't Win

  • Riksbank forced to defend its record ahead of rate meeting
  • Critics say excessive easing is fuelling property bubble

Damned if you don’t and damned if you do.

That sums up the life of Sweden central bank Governor Stefan Ingves over the past six years. First he was called a “sadomonetarist” by Nobel laureate Paul Krugman for not cutting interest rates fast enough in the face of deflation; now he’s being accused of endangering the economy as he unleashes the full might of his monetary policy toolbox.

Stefan Ingves

Photographer: Johan Jeppsson/Bloomberg

The governor, who also chairs the Basel Committee, the central bank of central banks, has misunderstood Sweden’s place in the global economy and the power it has to steer its own fate, according to investors, professors and analysts. His attempts to weaken the krona and revive inflation in the face of monetary stimulus from the European Central Bank will ultimately fail, a growing chorus of critics claim.

“What’s abnormal right now is not inflation but monetary policy,” said Andreas Halldahl, who manages about $16 billion in bonds at Storebrand Kapitalforvaltning AS, in Stockholm. “I don’t think they can or will manage to constantly keep the krona undervalued. Is it worth it? No, I don’t think so.”

Split Again

Ingves last month brushed aside growing reluctance within the bank’s board and reduced the main rate even deeper below zero, to a record minus 0.5 percent. That’s in marked contrast with a couple of years ago, when his board members were criticizing him for not cutting rates fast enough.

The Riksbank has also signaled it’s prepared to increase its bond purchasing program and intervene in the currency market for the first time in 15 years as it struggles to fulfill its mandate of 2 percent inflation.

Still, there are signs that the record easing is finally feeding through to the largest Nordic economy, with gross domestic product expanding at its fastest pace in five years. The downside is that the stimulus is also driving house prices up to levels that some say may be unsustainable.

Wrong Policy

Lars Jonung, an economics professor at Sweden’s Lund University and the former head of Sweden’s fiscal policy council, argues that the central bank’s policy is now “completely wrong.” 

“It’s fueling Swedish house price inflation, asset prices, and Sweden is growing really fast,” he said. “We shouldn’t be this expansive. It’s really dangerous. Sweden is moving towards overheating. The risks are big.”

The central bank is not unaware of the risks but argues that it’s up to the government and other regulators to cool the housing market.

According to Magnus Nilsson, a portfolio manager at Catella Fondforvaltning in Stockholm who manages about $2.6 billion in bonds, the central bank should realize its limits in affecting inflation and change its mandate to also include economic growth. It should also tolerate limited periods of inflation at 1 percent or lower.

“Sweden is today one of Europe’s fastest growing economies," Nilsson said. To go "all in with negative rates, verbal currency interventions and quantitative easing through bond purchases” will increase “apparent risks” on the housing market, he said.

Nilsson blames the Riksbank for "ignoring the problem" and opting for a “meaningless” rate cut instead.

Policy Pirouettes

And yet, that reduction may also have been the last. Minutes from the last meeting showed that two of the board’s six members were against the cut. The abstainers say that the bank has succeeded in stabilizing long-term inflation expectations and that price growth is on the way up.

They could be right. Underlying inflation, a preferred measure of the bank, was 1.6 percent in February, the highest since August 2011.

Sweden’s unemployed may also have found solace in the bank’s aggressive easing as unemployment has slid to 7 percent, down from almost 8 percent when the campaign started.

“I don’t share the sometimes very pointed criticism that monetary policy is creating rather than solving problems,” said Riksbank Deputy Governor Per Jansson in a Dagens Industri opinion-piece Tuesday. “An important point that critics, unconsciously or consciously, don’t take into account is that the labor market and growth data in the Swedish economy, to a large degree, is a result of the conducted monetary policy.”

Still, ultimate success in fulfilling its inflation mandate may be beyond the central bank’s powers.

“You can more or less do any domestic pirouettes you like,” said Henrik Unell, a currency analyst at Nordea Bank in Stockholm. “This is a supply shock that’s hit the world. And that’s the reason why we have low inflation.”

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