Sweden’s central bank warns of “property accidents” with the aim of curbing inflation
Bloomberg | | Posted by Yagya Sharma
Sweden’s central bank will do what is necessary to bring inflation back to its 2 percent target, even if it hurts the economy and leads to “disasters” in the country’s real estate sector, according to Riksbank Governor Stefan Ingves.
The Riksbank has implemented record interest rate increases in response to inflation at three-decade highs and expects to continue increasing borrowing costs. These measures are weighing on housing prices, which have fallen by more than 11% since March, and are also putting pressure on the country’s commercial real estate sector.
– I would be surprised if no accident happens, somewhere, because prices are increasing, Ingves said at a parliamentary hearing in Stockholm. “We have to live with that, given that the inflation target is what it is.”
The bank predicts an 18% drop in housing prices from the peak, and Deputy Riksbank Governor Per Jansson, who also attended the hearing, said the central bank will closely monitor developments in the sector.
– We can see that the decline in Sweden tends to be quite steep compared to other countries, possibly because we have a significant sensitivity to interest rates, says Jansson. “Our aim is obviously not to bring about an economic collapse, so you always have to take various developments into account and calculate what the effects might be on, for example, consumption.”
The officials emphasized to the legislators that the Riksbank’s success depends to some extent on fiscal policy not undermining its efforts.
“There is no free way out of this — no magic tricks — but there are different paths back to normalcy,” Jansson said. “The cheapest way is to take joint responsibility and thereby be able to raise the rate as little as possible.”
Further comments:
- Ingves said it would be “inappropriate” to stop requiring mortgage holders to make repayments. “We have the eyes of the world on us, and we have a huge market for mortgage bonds. To tinker with the systems now would be to shoot yourself in the foot, because we’ve been in dangerous territory for a long time.”
- On inflation expectations, Ingves said that if they rise, it will take time for them to fall back, which speaks to acting in the short term
- Jansson added that it is easy for the central bank to lose trust, and very costly to restore it. “It has to be done by taking action; there is no other way,” Jansson said
- Ingves also said that the real interest rate will need to be somewhat positive in the short term. In the long run, he said, “we don’t know where real interest rates are going and what the nominal interest rate will lead to”