Swedish $290 Million Hedge Fund Bets on Shift in Riksbank PolicyBy
Ambrosia says Riksbank may focus on household debt again
Says shift in policy could trigger move in long real rates
Swedish hedge-fund Ambrosia is positioning itself for a possible shift in Riksbank policy that could see the central bank abandon its sole focus on inflation as soon as the current round of wage talks is over.
Fund manager Torbjorn Olofsson says the outcome of salary negotiations affecting more than 2 million Swedes will be “some kind of graduation day” for the Riksbank. That’s because it has “invested so much” in trying to boost inflation expectations in order to lift wages, he said in an interview in Stockholm.
“Once wage negotiations are over, they will have to make a choice: Should inflation expectations be their sole priority, or should they also consider other aspects of the economy as they did before, such as soaring house prices,” Olofsson said.
Such a shift would mark a reversal of a policy in place since 2014, when the Riksbank abandoned its focus on household debt and decided to concentrate purely on inflation as it struggled to get consumer prices to rise. Prior to that shift, the bank had been hesitant to lower rates due to concerns that it would boost indebtedness and housing prices further.
A fresh change in the bank’s stance could trigger a move in long real rates, which are currently far below their long-term natural level, Olofsson said.
“Our main position is being short on long Swedish real rates as the Riksbank will eventually have to end its quantitative easing program and as the current level of the long real rate is far below most estimates for the natural level,” Olofsson, who helps oversee 2.6 billion kronor ($290 million) in assets, said. The real key-policy rates are now around minus 2 percent, while most estimates for the long-term natural real rates are at plus 1 percent, he said.
Still, Olofsson said he believes that long real rates will rise only very gradually toward the natural rate and that most likely, both the Riksbank and the European Central Bank will be slow to react to rising inflation and overheating economies as their risk-reward favors this. That means short rates will lag behind the increase in long rates, he said. Sweden will probably start unwinding its unconventional policies before the ECB, as the output gap hasn’t yet closed in Europe and as unemployment is still high there, Olofsson said.
Ambrosia has also taken a “small bet” that Swedish short rates will rise in relation to short European rates as it believes “that the weighed probability for that scenario is slightly higher than what the market is pricing in,” he said.
After missing its 2 percent inflation target for years, the Riksbank has cut its key rate deep below zero and bought billions of kronor of government bonds. While that has lifted consumer-price increases toward its target, the annual underlying inflation of 1.5 percent in March missed both analysts’ and the Riksbank’s expectations.
Trade unions and employers in the industrial sector, whose agreements set the norm for other industries, last month agreed on annual wage increases of 2 percent over the next three years, well below the central bank’s target of 3.3 percent.
Olofsson said he thinks the Riksbank should tolerate missing its 2 percent inflation target for a longer period of time in order to curb credit growth. Household debt levels and home prices have surged, fueled by record-low mortgage rates and a shortage of homes.
“We’ve had high credit growth for such a long time and it can get nasty if there is a correction,” Olofsson said. “It would be good if they had a wider approach to monetary policy.”