Today we have quite a bit of economic news from a country I have been keen to look at and analyse because there is so much going on. We can start in what has become quite a sequence with another one of these.
Inflation is far too high and has continued to rise. For inflation to fall and stabilise around the target within a reasonable time, the Executive Board has decided to raise the Riksbank’s policy rate by 0.5 percentage points to 3.0 per cent. The policy rate will probably be raised further during the spring.
After a period where 0.25% interest-rate increases seemed to be the likely way forwards we have seen an outbreak of 0.5%s as well. There is a special significance in terms of overall theme here because Sweden is one of the countries breaking away from NIRP as it was one of those with negative interest-rates. Although the Riksbank is probably hoping we will have forgotten that. They were to some extent bullied into it by Paul Krugman of the New York Times.
OK, this is fairly amazing. I’ve written often about sadomonetarism among central bankers — the evident urge to find some reason, any reason, to raise interest rates despite high unemployment and low inflation.
Of course Paul has other issues these days around the rise of inflation. From February 7th 2021.
Fear of inflation are greatly exaggerated: the economy can probably run hotter than CBO thinks, the multipliers on a lot of the spending probably aren’t that high, and the Fed is well able to contain inflation if it becomes a problem
I am not sure how much more wrong he could be? Anyway for our purposes we saw what became called the Rikshog.
$SEK. This just in!
Little Ole #Rikshog reports: no cute curling of the tail! pic.twitter.com/H3Y6IgsTet
— Martin Enlund ⚡️🦆🚁 (@enlundm) July 1, 2021
As you can see this may be the most spectacular failure of central bank Forward Guidance there has been.The continually promised higher interest-rates and then did not deliver it. Remember central bankers emphasise “expectations” so consumers and businesses were expected to act on this and would have made quite a sequence of errors of they had. That of course gets swept under the carpet now and they need a large carpet for this purpose.
Remember the central banking claims that the period of negative interest-rates did not weaken banks. Even Monte Paschi can make some money now as it showed the other day as essentially the return of interest-rates allows it.
Problems
We can move on from past problems as the Riksbank is pretty keen these days for people to forget its enthusiasm for negative interest-rates, But now like so many other central banks it has this one.
Swedish inflation is very high. CPIF inflation rose to just over 10 per cent in December. Even disregarding the rapidly increasing energy prices, inflation was high and still rising. Other underlying measures of inflation
have also continued to rise.
So five times the target and they seem to have lost faith that they can torture the numbers to provide core inflation measures suggesting inflation is lower. Even the energy excuse is struggling with the reality of this.
But even disregarding energy prices, inflation is still rising and far too high at 8.4 per cent.
If Swedes are suffering from inflation then apparently they can step into a world of expectations and all will be solved!
The long-term inflation expectations in surveys remain relatively stable and close to the inflation target of 2 per cent, albeit just above.
Of course you can expect whatever you like and central bankers have. Inflation expectations for now were as below two years ago.
However, the extent of the crisis means that it will take until 2023 before inflation is close to the target of 2per cent more permanently.
Indeed in one of the policy failures of our time they were trying to raise inflation. The emphasis is mine.
extensive monetary policy support is still needed to facilitate the recovery and help inflation rise towards the target
To be fair they did manage that…
The problem comes from something that they try to present as a triumph.
To bring down the high inflation, the Riksbank has raised its policy rate at every meeting since April 2022, in total from zero per cent to 2.5 per cent at the end of 2022.
As Caole King would say.
And it’s too late, baby, now it’s too lateThough we really did try to make it
Recession
If you miss the timing for controlling inflation and then not only raise interest-rates but promise this.
The forecast for the policy rate indicates that it will probably be raised further during the spring.
Then you should not be surprised if you get this.
Although a tighter monetary policy means that economic activity will weaken further in the near term, achieving low and stable inflation within a reasonable period of time is a prerequisite for good growth in the Swedish economy.
There is a lot going on here. Is this the “low and stable inflation” they put so much effort into achieving in 2021? Anyone can see it way overshot. Will that happen with growth? Also growth now seems to being presented as bad……When does it become good?
Whenever foreigners are blamed you know trouble is ahead.
Over the coming year, economic activity will slow down both in Sweden and abroad. Weaker demand from abroad will reduce Swedish exports, at the same time as rising prices and interest rates will undermine households’ purchasing power and lead to weaker consumption.
Next up is something that will send a chill down the spine of any central banker.
Falling housing prices will lead to lower housing investment, which will reinforce the economic downturn.
But I particularly note this.
All in all, economic activity will slow down in
2023, weakening the labour market and leading to a lower employment rate.
Because as the news clicked through the other day I spotted this from Sweden Statistics.
Sweden’s GDP decreased by 0.5 percent in December, seasonally adjusted and compared with the previous month, as shown in the preliminary compilation of the GDP indicator. For the fourth quarter as a whole, GDP decreased by 0.6 percent, seasonally adjusted and compared with the previous quarter.
Whilst monthly GDP measures are unreliable a 0.5% fall is probably still significant and that is quite a fall for the final quarter of 2022. It has been a rough run.
In December, GDP was 1.8 percent lower than in the corresponding month a year ago. For the fourth quarter as a whole, GDP decreased by 0.6 percent compared with the same quarter a year ago.
In the series there was also quite a mark down for November which previously had shown growth. So are we turning down from that or did the Riksbank miss that too?
Comment
The issue of timing is very important here. Back in 2021 the Riksbank was making an “extensive” effort to raise inflation. But this morning they assure us of this.
Tightening monetary policy more now reduces the risk of even more serious problems with inflation and greater monetary policy tightening further ahead, which would have comprehensive negative consequences for the Swedish economy.
So it was good then but bad now? That is really awkward as if we allow for the lags inflation arrived on cue after their policy moves.
If we switch to the tightening we see began in April of last year that will come into effect just as they expect the economy to be weak.
The Economic Tendency Survey shows that households’ views of both their own finances and the Swedish economy are more pessimistic than ever before and that confidence in both the retail trade and the service sector is very weak.
A successful central banker tightens when the party is getting going and helps when times are getting tough. Whereas as we have seen the Riksbank has done the reverse. Thus if they ever were sado-monetarists they have made a journey from that into being headless chickens.