Why is Swedish monetary policy so loose?

By K.K.

THE Swedish economy is, by all accounts, booming. Output, adjusted for inflation, has grown by 2.8% on average since 2009 and rose by a robust 3.2% last year. In April Swedish inflation nearly hit the target of 2% aimed at by the Riksbank, Sweden’s central bank. Yet the Riksbank has chosen to leave interest rates at an extraordinarily low level: below zero, in fact, at -0.50%. In addition, it is increasing stimulative asset purchases, known as quantitative easing (QE). What is the Riksbank up to?

Sweden’s central bank is not alone in erring on the side of dovishness. Even as post-crisis doldrums give way to steady growth, central banks worldwide tend to remain cautious, because often faster growth has not yet led to high inflation. American economic growth has been chirpy for years, and unemployment in America has just fallen to a 16-year low of 4.3%, yet the Federal Reserve’s target range is still only at 0.75-1%. The Fed is tightening—it has ended its own QE programme and begun lifting rates—but at a slower pace than it aimed to achieve two years ago. In the euro area, the European Central Bank (ECB) is still buying bonds by the barrel in an effort to keep inflation moving towards its target. Small, open economies face the additional complication that capital flows from abroad can interfere with their own monetary policy. The Swiss central bank, for instance, has seen its balance-sheet swell to over 100% of GDP as it has sought to dampen upward pressure on the Swiss franc, traditionally seen as a safe haven.

The Riksbank has two particular reasons to play it safe, however. On the domestic side, the recent bump in inflation may be a one-off, driven, as it was, partly by rises in airfares and energy prices. What’s more, after raising rates prematurely in 2010 and 2011, the Riksbank is loth to do so again until it can be sure of sustained higher inflation. The second, international factor may loom larger in the central bank’s considerations. It fears that tightening policy before the ECB, in an economy closely linked to the euro area by trade and capital flows, would lead to a strong appreciation of the krona. That would make imports cheaper and thus drag inflation back down as well as squeeze exporters.

The prolonged period of accommodation by the central bank has fanned ongoing arguments about the balance of monetary risks. Some officials worry that low rates amid steady growth are likely to inflate asset prices to dangerous levels. In Sweden, worries have centred on property prices, which rose by 8% in 2016 and 10.8% in 2015. A full-blown financial crash is unlikely: banks learnt from Sweden’s severe banking crisis in the early 1990s, and the assets of Swedish households easily exceed their debts. Nonetheless, there is a fear that if mortgage payments were to rise, aggregate demand might drop. Average Swedes, for their part, are probably focused on other economic challenges: like the work of integrating the more than 300,000 asylum-seekers who have arrived since 2013—something that falls far beyond the Riksbank’s remit, and is left for politicians to chew over.