Translation of DN Debatt 5 Nov 2014

Translation of DN Debatt 5 Nov 2014 (see here for a description of this project). My analysis comes in the next post.

”Introduce  amortization requirements to slow the housing credit growth”

Published 2014-11-05 00:40

Sveriges sysselsättning

Graphs showing employment in Sweden, the UK, the US, and the Euro area.

Right monetary policy. Sweden’s challenge is twofold: On the one hand, companies need economic stimulus and increased demand. On the other hand, household debt accumulation needs to be slowed down. After the rate cut amortization requirements should now be set in place to stop the credit growth and make sure that Sweden stands strong in the future, writes Riksbank Governor Stefan Ingves.

The Riksbank’s announcement to lower the interest rate to zero has received considerable attention, which is good. We want to send a clear signal that we focus on the inflation target, mainly because it serves Sweden well as an anchor for price and wage formation.

At the same time, there has also been an intense debate about the monetary policy the Riksbank has conducted. Let me give my views on this and conclude with some reflections on the way forward.

Sweden is doing well. Next year we expect GDP to increase by 2.7 percent – a good level of growth in the current uncertain global economy. There are people who compare Sweden with Japan, with its periods of low growth and falling prices, but Sweden has a much better starting point:

Sweden has managed the recent financial crisis well, with growth in every year but the worst crisis year of 2009. GDP has grown by more than 6 percent since then, compared with the euro area’s growth of 1 percent. GDP per capita, too, has developed favorably in international comparison.

Swedish households continue to consume at a good pace, and companies seem, by and large, to be able to get the credit they feel they need. The credit system works and has done so continuously.

After the crisis employment and the labor force has also grown in Sweden, unlike in most Western countries. The employment rate in Sweden is significantly above the US and the euro area.

It is hard to believe that such a development would have come about without the help of a reasonably well-balanced monetary policy.

Low inflation is a global challenge. What we struggle with is too low inflation, but that challenge we share with many countries. Inflation is now 0.3 percent, excluding the effect of interest rate cuts (CPIF). The companies in our surveys say that they find it difficult to raise prices, that demand is too low and that competition is fierce. We need to acquire more knowledge on the effects of new patterns of consumer behavior – for example, that consumers now can compare prices significantly easier and faster than before. Oil prices has fallen despite geopolitical unrest and a strengthening global economy. Probably this is due both to subdued international demand and to an increasing supply of shale assets. The low food prices is a global phenomenon that hold back inflation. Price behavior is, in other words, guided partly by factors outside Sweden.

Swedish monetary policy is expansive and effective. Critics have argued that we have kept interest rates too high and that we should have cut them more quickly to stimulate demand more and to increase inflation. But this ignores the fact that the Executive Board has reduced the interest rate from 2 percent to zero since 2011. The increase from 0.25 to 2 percent just after the crisis should be seen in the context of the Swedish economy growing by almost 6 percent and inflation being close to target. A strong economic development justifies a less stimulating interest rate.

Anyone who immerses himself in the protocols can easily see that the differences in the Executive Board concerned the appropriate time to raise the rates, and that everyone agreed that interest rates would have to rise. Even the members of the Executive Board who wanted a comparatively more dovish interest rate policy advocated, for example, in July 2011 that the policy rate should be raised gradually to 3.8 percent in mid-2014, which was only marginally below the majority’s preferred interest rate path. It is true that we have communicated actively on debt to get the issue on the agenda, but the rate increases primarily had conventional monetary policy purposes.

In addition, the market rates in Sweden have followed the repo rate very well. Both Swedish households and companies have faced low interest rates – lower than in the euro area last year, even though the ECB’s policy rate has been lower. This shows that Swedish monetary policy works effectively, and is also a reason why we have weathered the crisis in relatively well.

It is possible that an even more expansionary monetary policy would have raised inflation slightly. But then one should, in fairness, also take the fact that the real interest rate has been extremely low or negative since 2009 into account. In addition, Sweden had at that time no framework for prudential supervision in place to curb households’ credit growth. The measures have been introduced since then have not been sufficient.

Inflation will rise. There are those who argue that the interest rate cuts are not enough. Some facts that tell against this are that the Riksbank has cut interest rates sharply, has postponed the time of the first increase and that monetary policy so far has had a good impact on the rates that households and companies get.

Decreasing the Swedish repo rate gives visible effect but it takes, as always, time before they have full effect. Our own forecasts, as well as those of international observers, indicate that global growth is rising. This favors Swedish export companies, and there is probably also a limit to how long the Swedish companies can and want to postpone their price increases. The Executive Board will also postpone interest rate hikes until inflation is clearly gaining momentum.

The household debts must be managed. The Executive Board is concerned about what this means for household debt growth. The difficulty for Sweden is that since the crisis, we have had two problems. Companies need stimulus so that demand picks up, while households need to slow their credit growth. You cannot have two different interest rates, and therefore we must find another way.

Household mortgages are currently increasing by 6 per cent year – which is more than twice as fast as GDP and almost twice as fast as household disposable income. Meanwhile, house prices have continued to rise. There is a clear pattern throughout history that financial crises are often preceded by high indebtedness and rapid growth in credit and property prices.

The Executive Board is pushing this issue because these kinds of problems always land in the Central Bank’s and the taxpayer’s lap. But I want to be clear that this is not an issue that a single agent can solve, but which requires cooperation between different policy areas and authorities. The measures that will be required may not always be popular but it will not be easier later on – especially not when the interest rates finally rise.

We need several measures to deal with this situation, but a good initial step is to introduce amortization requirements. Here it is obviously important to apply an appropriate dosage so that credit and house price growth slow but a sharp fall in house prices is avoided.

It is high time to press the brake on credit growth so that Swedish households are well equipped to cope with both upturns and downturns in a stable and secure manner in the future, too.


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