Problems are mounting again for the Riksbank of Sweden

by Shaun Richards

Today is one which will concentrate the minds of the Riksbank of Sweden. One way or another they will find themselves affected by what action the European Central Bank takes. Conceptually this is really rather awkward for them as they took this action just before Christmas.

The Executive Board has therefore decided to raise the repo rate from −0.50 per cent to −0.25 per cent.

Even worse they gave Forward Guidance like this.

The forecast for the repo rate indicates that the next rate rise will probably occur during the second half of 2019.

Many central banks have a poor record with their Forward Guidance but the Riksbank competes with the Bank of England for the worst effort. Of course they could decide to support the Krona by raising interest-rates as the ECB eases but that would be a road to Damascus style change. But that does give us the opening influence on their policy which is the large influence of the Euro/Krona exchange rate on Swedish economic policy.

As to the Krona the Riksbank has produced a report suggesting this.

The overall conclusion is that the krona is unexpectedly weak and that a certain appreciation is to be
expected, but that there is considerable uncertainty as to both when and by how much the krona
will strengthen.

Perhaps the appreciation will be due to a new hard Krona policy or perhaps I am jesting. But how can they say their currency is “unexpectedly weak” after applying negative interest-rates and QE bond buying? Of course they do expect people to believe the new version of Forward Guidance.

More precisely, the rate path means that an initial rate rise may occur in October, December or February. After that, the repo rate will be raised by just under 0.5 percentage points a year.

So we can note that the Riksbank is playing the same old song ignoring the fact that over the past 5/6 years it has been full of bum notes. Also as I regularly point out timing is nearly as important as what you do or as Bananarama put it.

It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
And that’s what gets results

On that score the Riksbank took so long to try to get interest-rates out of negative territory that it has done so into a world downturn.

Labour Market

Riksbank policymakers will have been spluttering into their morning espresso as they read this earlier.

In June 2019, there were 427 000 unemployed persons aged 15–74, not seasonally adjusted. This corresponds to an unemployment rate of 7.6 percent. ( Sweden Statistics )

This caught expectations of 6.5% out and yes I did type that correctly. Firstly we should be clear that the monthly unadjusted number is an erratic series But last October and November it was 5.5% and ( with fluctuations) has been rising since. Or if we look at the latest 3 readings we see 6.2%,6.8% and now 7.6%.

If we move to the adjusted series we see this.

Smoothed and seasonally adjusted data indicates a decrease in the employment rate and an increase of the unemployment rate. The unemployment rate was 6.3 percent.

The problem here is use of the word “Smoothed” or if you prefer averaging because it reduces the use of the number as an economic indicator as you will only learn of changes after a delay. The more the numbers are smoothed the more the delay. Danske Bank calculate their own seasonally adjusted series and put the number at 6.6% compared to a couple of occasions where it has dipped below 6%.

If we switch to employment which has worked as a leading indicator at times in the credit crunch era we see another hint of trouble.

 It was the second month in a row that employment did not increase, compared with the same month previous year. Before that, the number of employed persons has increased every month since September 2016……..Smoothed and seasonally adjusted data indicates a minor change in the number of employed persons and a decrease in the employment rate compared with recent months.

Money Supply

We have learnt over the past year or two that narrow measures of the money supply are the best economic leading indicator we have and here is this morning’s release.

The annual growth rate of the narrow monetary aggregate, M1, amounted to 6.8 percent in June, a decrease of 0.5 percentage point compared with May. M1 amounted to SEK 3 053 billion in June.

If we look back we see that the number has been falling since 13.8% was recorded in 2015. That followed the introduction of a negative official interest-rate ( repo rate) and the commencement of QE bond buying. Last year the growth rate had fallen to 7.3% and the latest data raises concerns about further falls as 2019 develops.

Another interesting development is that the stock of note and coins in Sweden rose last year. I note this because Sweden is famous for switching towards electronic forms of payment and cash and has previously seen some ten years of falls in the amount of physical cash. But whilst last year’s rise was small at 1.9% there was one.

Another possible guide is that credit to business seems to be slowing.

In June, the annual growth rate on loans to non-financial corporations was 5.2 percent, which is a decrease of 0.9 percentage points compared with May.

Household credit

This can be viewed through two windows of the Riksbank. A bit like in the BBC childrens TV series Blue Peter. Through the round window the number below is good because Sweden’s households are over indebted. Through the square window it is bad because they may consequently consume less and weaken GDP growth.

In June 2019, the annual growth rate of households’ loans from monetary financial institutions (MFIs) was 4.9 percent, which means that the growth rate decreased by 0.1 percentage point compared with May.

As to interest-rates you may be wondering what a mortgage typically costs in Sweden.

Households’ average housing loan rate for new agreements was 1.52 percent in June, unchanged compared with May. The floating housing loan rate amounted to 1.54 percent in June, which is unchanged compared with May.

That is a bit over a half a percent lower than the UK so the delta from reducing interest-rates seems to be around 0.5 at these levels or mortgage rates fall by around half off the official rate change.


We have looked at the domestic situation in Sweden and now let us widen our scope. We started the week by looking at signs of economic weakness in the Pacific and that has continued this morning with the news that Nissan is looking to shed around 9% of its workforce. These days Nissan also has strong links to Europe and the mood here will not be helped by this.

German business morale plunged in July to its lowest level in more than six years, a survey showed on Thursday, in a further sign that a manufacturing crisis is pulling Europe’s largest economy toward recession……..The Ifo institute said its business climate index fell to 95.7 from an upwardly revised 97.5 in June. The July reading undershot a consensus forecast for 97.1. It was the fourth monthly decline in a row and the lowest level since April 2013. ( Reuters)

For Sweden this means that the outlook for its major trading partner is poor. Thus the reality is that the Riksbank looks more likely to cut interest-rates again than raise them.

Meanwhile we get yet more evidence that banks take the “Be afraid, Be very afraid” strap line from the film The Fly about inflicting negative interest-rates on the ordinary depositor.

The average interest rate for new deposits by households in bank accounts was 0.07 percent in June, a decrease of 0.01 percentage points compared with May. The interest rate on accounts with fixed periods or a limited number of free withdrawals amounted to 0.17 percent in June, an increase of 0.01 percentage point compared with May.

The Investing Channel