Sweden’s central bank will probably press ahead with an interest-rate increase this week, testing consumers already enduring a cost-of-living squeeze, a housing rout and a shrinking economy.
(Bloomberg) — Sweden’s central bank will probably press ahead with an interest-rate increase this week, testing consumers already enduring a cost-of-living squeeze, a housing rout and a shrinking economy.
Riksbank Governor Erik Thedeen has indicated that a hike of either 25 or 50 basis points is likely on Wednesday. Economists expect him to opt for the larger option, bringing the benchmark rate to 3.5%, after a slowdown in underlying inflation failed to materialize as expected.
The decision showcases how the Riksbank faces some of the toughest policy trade-offs in the advanced world as it persists with monetary tightening that other peers may be close to halting.
Its balancing act pits the urgency of bringing Swedish inflation to heel against the damage already coming from a decline in property values and housing construction near a standstill. Wider financial stability worries after recent global bank failures are a further complication.
On Tuesday, Swedbank AB economists said the inflation squeeze will inflict “two tough years” on the economy, which could suffer the steepest contraction in the European Union this year, according to OECD forecasts.
“I am slightly concerned that a half-point increase may be a bit too large,” said Stefan Gerlach, chief economist at EFG Bank in Zurich, who expects the Riksbank to opt for that anyway. “The other option, which I think seems more reasonable for the Riksbank considering the housing-market issues, is to raise rates somewhat less but keep them at that level for longer.”
Sweden’s property slump is standing out globally as one of the worst in the current cycle. A 15% drop in home values is rocking a market long fueled by cheap credit, adding to concerns about a highly leveraged commercial real estate sector.
The Riksbank has sought to reassure investors that its hands aren’t tied by the property rout. Thedeen even insists the drop in home values is “good for the Swedish economy.” Swedbank’s assessment is that “most of the price adjustment in the housing market has already taken place.”
Gerlach, a Swedish national and former deputy governor of Ireland’s central bank, cautions that the Riksbank risks causing a rapid decline in property values that may be difficult to stop.
“Keeping the rate too high will impact the housing and commercial property markets, and I am concerned about the consequences of that,” he said. “Keeping the rate too low, on the other hand, could lead to inflation being somewhat higher for somewhat longer. I believe that would be less damaging.”
The case for a more cautious approach was strengthened by a recent large scale two-year pay agreement, which helped to temper concerns about a wage-price spiral.
Olle Holmgren and Carl Hammer, chief strategists at SEB AB, put a 35% probability on a 25-basis point hike on Wednesday, arguing that stable inflation expectations and financial stability concerns could also play into the bank’s decision.
The Riksbank’s primary focus remains underlying inflation after a string of outcomes showed that measures of consumer prices excluding energy were rising faster than it had expected.
Thedeen, who took the helm at the Riksbank at the beginning of the year, has repeatedly stressed that the bank’s decisions will be determined by incoming data. In March, while underlying inflation was lower than economists had expected, it still far exceeded the Riksbank’s forecast.
The Swedish currency is another headache, having struggled to gain ground against the euro and thereby importing inflation. Even if the Riksbank hikes by a half point to 3.5%, foreign-exchange concerns may be another reason to keep going to keep up with the European Central Bank.
Most economists surveyed by Bloomberg believe the Riksbank will hike again in June before staying its hand, but guidance on future policy moves may be somewhat more vague than usual.
“The high inflation means that the Riksbank isn’t done and probably wants to signal another hike at its June meeting, but avoid guiding beyond that,” Swedbank analysts Carl Nilsson and Glenn Nielsen said in a note. “The ongoing uncertainty is a big reason for the Riksbank not to tie itself down with a specific size of the June hike and instead let the economic data be the deciding factor.”
–With assistance from Ott Ummelas, Joel Rinneby and Gina Turner.
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