Sweden’s hot economy causes the Riksbank to split over stimulus keeping
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By Niclas Rolander
(Bloomberg) –
The press is hoping for Riksbank Governor Stefan Ingves to unwind the central bank’s extremely loose policy when Sweden’s tight labor market and rising energy prices begin to transform into broader inflation.
The Nordic nation has recovered quickly from the pandemic and its economy is showing signs of overheating, which has prompted critics within the bank as well as externally to push back on stimuli. In the minutes of a policy meeting earlier this month, three dissidents presented their arguments for why the central bank should reduce its bond holdings in the coming quarter.
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“After our most recent monetary policy meeting, inflation has been surprisingly high while the economic outlook remains strong,” said Deputy Governor Martin Floden at the meeting on 9 February, according to the minutes published on Monday. “The arguments for settling asset purchases somewhat faster have thus been strengthened.”
Ingves and two deputies opposed the move and won the day with the help of the Governor’s casting vote, but opposition to the Riksbank’s deaf stance is far from limited to the Executive Board. Annika Winsth, chief economist at Nordea and a prominent critic, says that the Riksbank should reconsider its stance because employment is clearly above pre-pandemic levels and companies are struggling to hire and retain staff.
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“We are approaching two years of recovery, and if you maintain a crisis policy in that situation, it is not surprising that you end up in a situation with an extremely hot labor market,” Winsth said in a telephone interview. – The Swedish economy does not need this stimulus. Rather the opposite.”
Pricing, housing risks
Regardless of the criticism, data could force Ingves and his allies to change pace soon. Figures released last week showed that core inflation, which removes energy, rose to its highest level since 2002 and far exceeded the Riksbank’s expectations.
It pushes a whole in the position for pigeon interest rate setting, which has claimed that the total inflationary pressure is moderate, with reference to price increases excluding energy being below 2%.
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In the midst of a sharp rise in housing prices, the Riksbank’s purchases of mortgage bonds have also led to some concern that they could contribute to increasing the risks to financial stability. Erik Thedeen, head of the Swedish Financial Supervisory Authority, said earlier this month that the bank should move towards concluding purchases.
While Ingves has regularly mentioned housing risk – once likened to “sitting on top of a volcano” – he usually points out that the management of market failures is a problem for politicians, and not the Riksbank. But Winsth says the central bank should take into account high levels of household indebtedness.
“The central bank has a responsibility when it sees that the structure is wrong,” she said. “Saying that someone else is going to fix this is a bit like putting your head in the sand.”
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Rate doubts
In addition to the internal debate on asset purchases, investors express serious doubts that the Riksbank can stick to its plan to keep the key interest rate at zero until 2024. The fixed income markets have now priced in almost two increases of 25 basis points in one year.
The protocol gave some indication that the gap between market expectations and the Riksbank’s plans can be significantly reduced when decision-makers meet for their next interest rate decision.
The river, as well as Deputy Governor Anna Breman, indicated that they may have been willing to support an earlier interest rate hike. Even Ingves mentioned the importance of “an interest rate with a respectful distance from zero.” Comments such as these, together with the latest financial data, create the conditions for an interesting meeting in April.
“If they’re going to turn the tide, it’s probably when they have to do it,” Winsth said. “In that case, they could flag an interest rate hike in September, or more likely November. After that, it’s almost too late.”
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