This morning has brought us a new adventure in the world of central bank Forward Guidance.
The Executive Board has therefore decided to hold the repo rate unchanged at −0.50 per cent. If the economy develops as expected, there will soon be scope to slowly reduce the support from monetary policy. The forecast for the repo rate indicates that it will also be held unchanged at the monetary policy meeting in October and then raised by 0.25 percentage points either in December or February.
You may already have realised that this is from the Riksbank of Sweden and that there is something awfully familiar about this as Martin Enlund highlights below.
$SEK: another dovish Riksbank rate path, but befuddling rhetoric since it indicates a December 2018 or February rate hike of 25bp (not only 10bp). In the end, core inflation will decide… #rikshog pic.twitter.com/GyIsvVM7fo
— Martin Enlund 🦆🚁 (@enlundm) September 6, 2018
There are a multitude of issues here. Let us start with the fact that the Riksbank was ahead of the game in offering Forward Guidance before the concept was formally devised. I guess that sits well with being the world’s oldest central bank. But the catch so typical of the way that Forward Guidance has developed is that it has proven spectacularly wrong! Indeed I cannot think of any central bank that has such a malfunctioning crystal ball. Ever since 2012 an interest-rate rise and indeed succession of rises has been just around the corner on a road that has been so straight even the Roman Empire would be proud of it.
One of the features of Forward Guidance is that it is supposed to allow businesses and households to plan with certainty. The reality here is that they have been consistently pointed in the wrong direction. Indeed their promises of interest-rate rises morphed into interest-rate cuts in the period from 2012 to 2016. Such that their forecasts if we try to average them, suggested the repo rate now would be of the order of 3-4%, rather than the actual -0.5%. If we look at the period when the repo rate has been negative they have consistently suggested it is temporary but it has been permanent so far, or if you prefer has been temporary as defined in my financial lexicon for these times.I think that there are two major possibilities here. The first is that they are collectively incapable of seeing beyond the end of their noses. The other is that it has been a deliberate policy to maintain negative interest-rates whilst promising to end them.
A more subtle suggestion might be that this is all for the foreign exchanges who do take a least some notice rather than the average Swede. After all if he or she did take notice of the Forward Guidance they have probably long since given up.
We get the picture here from this from Bloomberg.
Sweden’s elections this weekend could spell more pain for an already floundering currency.
As ever I will skip past the politics and look at the currency. One cannot do so without first noting the role of the Euro here which is like a big brother or sister to its neighbouring nations. When it cut interest-rates it put pressure on them to cut as well. So let us look at the Krona versus the Euro.
What we see is a clear pattern. Essentially the monetary easing of the Riksbank has taken the Krona from 8.4 versus the Euro in the late summer of 2012 to 10.57 as I type this. So a gentle depreciation to add to the negative interest-rates in terms of monetary policy as we rack up the stimulus count.
We can take that wider by looking at the trade-weighted or Kix Index. If we do so we get a similar result as the 102 of late summer 2012 has been replaced by 121 now. Just for clarity this index operates in the reverse direction to the usual method as a higher number indicates a weaker currency.
If we switch to inflation prospects then some should be coming through as the Wall Street Journal reported yesterday.
Down 10% against the dollar, the krona has fallen more than any other developed-market currency. Among the 10 most heavily traded currencies in the world, it has undershot even China’s Yuan—itself under pressure from the trade conflict with the U.S.—and the U.K.’s Brexit-bruised pound.
So commodity prices will have risen in Krona terms from this effect.
This has been another feature of the expansionary toolkit of the Riksbank
At the end of August, the Riksbank’s government bond
holdings amounted to just over SEK 330 billion, expressed as a nominal amount .Net purchases of government
bonds will be concluded at the turn of the year, but principal payments and coupon payments will be reinvested in the government bond portfolio until further notice.
So what has become regarded as a pretty regular QE programme which politicians love as it reduces borrowing costs for them. One generic point I would note is that these Operation Twist style reinvestments are only happening because QE has proven rather permanent rather than the extraordinary and temporary originally claimed. So far only the US Federal Reserve is attempting any unwind. Many argue this does not matter, but when you have redistributed both wealth and income towards the already wealthy I think that it does.
This has been an issue across more than a few countries recently, as we have been observing slow downs. This is also true of Sweden because if we look at the narrow measure or M1 we see that an annual rate of growth of 10.5% in July 2017 was replaced with 6.3% this July. If we look back we see that a major player in this has been the QE purchases because when the Riksbank charged into the bond market in 2015 the annual rate of growth in M1 went over 15% in the latter part of that year. Now we see as QE slows down so has M1 growth.
A similar but less volatile pattern can be seen from the broad money measure M3. That was growing at an annual rate of 8.3% in July 2015 as opposed to the 5.1% of this July. So we see clearly looking at these why the Riksbank has just balked on a promise to raise interest-rates at today’s meeting. Taken in isolation that is sensible and in fact much more sensible than the Bank of England for example which has just raised Bank Rate into monetary weakness.
I would like to present this in a new way. We have a conventional opening as according to Sweden Statistics house prices fell by 1.2% in 2012 ( they measure one or two dwelling buildings) which explains the about turn in monetary policy seen then. But if we switch to narrow money growth we see that it looks like there is a link. It peaked in 2015 as did house price growth (10.8%). It remained strong in 2016 and 17 as did house price growth ( 8.4% and 8.3% respectively). Okay so with money supply growth fading what has happened to house prices more recently?
In the last three-month period, from June to August 2018, prices rose by almost 1 percent on an annual basis compared with the same period last year.
Boom to bust? As ever we need to be careful about exact links as for example the latest couple of months have been stronger. But what if monetary growth continues to slow?
Readers will be pleased to discover that the Riksbank has investigated its own policies and given itself a clean bill of health.
The Riksbank’s overall assessment is that the side‐effects
of a negative policy rate and government bond purchases
have so far been manageable.
Where there is a clear question is a policy involving negative interest-rates, QE and a currency depreciation when the economy is doing this.
Activity in the Swedish economy remains high. GDP growth in the second quarter was surprisingly rapid and together with strong indicators, this suggests that economic activity is still not slowing down.
Inflation is also on target. So why is policy so expansionary? Perhaps Fleetwood Mac are correct.
I never change
I never will
I’m so afraid the way I feel
Should they reverse course and find the economy and house prices heading south thoughts will be a lot harsher than the “Oh Well” of Fleetwood Mac.
Oddly we find that fiscal policy is operating in the opposite direction as this from the Swedish Debt Office shows.
For the twelve-month period up to the end of July 2018, central government payments resulted in a surplus of SEK 109.6 billion. Central government debt amounted to SEK 1,196 billion at the end of July. This corresponds to 2.3 and 25.3 percent, respectively, of GDP.
We are in a rare situation where they could genuinely argue they have a plan to pay it all off. The catch comes with the fact that with a ten-year bond yield of 0.54% and a low national debt they have no real need to. So a joined up policy would involve ending negative interest-rates and some fiscal expansionism wouldn’t it?