The Riksbank of Sweden is lost in a land of confusion

by Shaun Richards

This morning has brought an event that the media used to eagerly await but today seemed to just slip by relatively unannounced. I suppose for a central bank which was called “sadomonetarists” and then by way of over reaction plunged into the icy cold world of negative interest-rates this is not as superficially exciting.

The Executive Board has also decided to hold the repo rate at zero per cent and it is expected to remain at this level in the years to come.

Actually this is quite a critique of past policy if you think about it. The Riksbank report tells us that it expects the official interest-rate to be 0% to at least the first quarter of 2024. This is in fact quite a change in itself as the chart below shows.

So our first context is that we are looking at an organisation which did the most ( in an admittedly competitive market) to make the concept of central bank Forward Guidance something of a laughing stock. They continually guided people towards interest-rate increases and then cut them. Will they do the same with the new 0% forever effort? Well it is hard not to have a wry smile after reading this on the newswires earlier.

BoJ may seek to clarify in March policy review that it has room to deepen negative interest rates – Jiji Press. ( @FinancialJuice)

It was only a couple of weeks ago we were being “guided” towards a tightening of monetary policy in Japan.

Even more significantly if we take the Riksbank at face value there is the issue of it applying a negative interest-rate of -0.5% in a boom ( economic growth went over 4% per annum for a while) and it is now applying 0% in what it describes as this.

A continued slow development during the start of this year means that GDP is ex‐pected to decline by 0.4 per cent in the first quarter, compared with the fourth quar‐
ter.

Now with the help of Sweden Statistics we can get more of a perspective.

This upturn means that in the second half of the year, the economy recovered 63 percent of the large decline from the second quarter. The indicator estimate of the fourth quarter point to a GDP growth figure for 2020 as a whole at -2.8 percent compared to 2019……..Calendar adjusted and compared with the fourth quarter of 2019, GDP decreased by 2.6 percent.

So we will be some 0.4% weaker than that although as you can see Sweden Statistics has a lot of doubts.

Before balancing, actual GDP growth from the expenditure approach was -3.1 percent, while the corresponding figure from the production approach was -1.2 percent compared with the same quarter a year ago. As a result, final actual GDP growth was -2.2 percent.

For newer readers I cover such issues regularly and in this instance am sort of grateful they have not included the income approach as we would likely have another different number! But the fundamental issue is that GDP numbers are much more uncertain than the media invariably present them.

So the Riksbank is in fact sending out another message which is that it has rejected negative interest-rates at least do now. I think that is behind this.

On average, GDP is expected to increase
by a good 3 per cent per year 2021–2023. Although the recovery is expected to be faster than was previously assessed, GDP will not reach its pre‐crisis level until the au‐
tumn.

The future is bright is the message here and perhaps they could play this for those on hold.

Don’t you worry ’bout a thing
Don’t you worry ’bout a thing, baby
‘Cause I’ll be standing on the side
When you check it out
When you get off your trip ( Stevie Wonder)

Quantitative Easing

A Martian observing events might reasonably think that the concept of QE would soon be over as after all the economy is projected to soon recover and then go on something of a tear. That is what 3% per annum is these days. We perhaps learn something there as there was a time it was considered normal, but for example if you said it was 3% in say Japan or Italy you would be told to do your homework again and may even be sent to bed with no dinner.

But look what has survived the apparently bright outlook.

Therefore, the Executive Board decided on 25 November 2020 that the Riksbank should continue to
purchase assets until 31 December 2021, and that these purchases should amount to a nominal total of up to SEK 700 billion.

You may note that they are planning to buy after the recovery is in play and they are repeating a mantra that is becoming more common amongst central banks they will buy “up to” an amount. This is curious because because so far I can think of lots of central banks which have bought more, indeed Japan had around 13 variations before they changed the name, but none who have ever bought less.

Oh and they have moved to a new area of expertise and indeed mandate.

Within the scope of this programme, the Riksbank is purchasing the Swedish state’s green bonds and green municipal bonds. Moreover, the purchases
of corporate bonds are limited to bonds issued by companies deemed to comply with international standards and norms for sustainability.

There is another area which raises a wry smile. Who could have possibly thought that short-dated Treasury Bills would mature quickly?

The treasury bills the Riksbank buys during the first quarter of 2021, in accordance with the Executive Board’s decision of 25 November 2020, will begin to mature already during the second quarter of the year. The
Riksbank therefore needs to ensure that the purchases of treasury bills continue to contribute to keeping interest rates low.

Why? The official interest-rate is 0% and we are told that will be so for some years and yet Treasury Bill rates were -0.18% at the sale on the 3rd of this month.

Comment

As you can see the picture at the Riksbank is very confused. If we look back it cut interest-rates into negative territory and then raised them into a decline and then collapse. Now it seems to be buying everything it can ignoring the consequent false markets that it is creating,

and corporate bonds for SEK 4.4 billion.

It might not seem a lot but look what it and the other QE moves have done.

In part?

Now we can switch to the issue of balance. Ordinarily central banks these days act to oil the wheels of fiscal policy whilst claiming to target inflation. The Riksbank gives this a go in PR terms,

The Riksbank estimates that the support
measures implemented in 2020 amount to around SEK 185 billion.

But not many places will be reporting this for January.

Swedish central government payments resulted in a surplus of SEK 7.7 billion in January. The Debt Office’s forecast was a deficit of SEK 10.6 billion. ( Riksbank)

Sweden has been borrowing over the pandemic as the numbers below show.

For the twelve-month period up to the end of January 2021, central government payments resulted in a deficit of SEK 209.8 billion.

But overall they run a tighter fiscal policy than even the Germans.

The public sector’s consolidated gross debt,
also known as the Maastricht debt, is expected to have risen from 35 to almost 40 per cent of GDP during 2020, but is assessed to gradually decline in the coming years. Un‐
like household indebtedness, the Maastricht debt has shown a declining trend over the past 20 years.

Did somebody mention household debt?

Debts as a share of households’ disposable incomes, what is known as the debt‐to‐income ratio, was almost 200 per cent in the third quarter of 2020. In the coming years, the debt‐to‐income ratio is expected to rise somewhat further.

 

 

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