Sweden lets rip another salvo in the currency wars

published 11 February 2016

160211-sweden — Sweden's savers won't be happy

Another central bank has ploughed its way further into negative interest rate territory.

Sweden's Riksbank has cut its benchmark interest rate from -0.35% to -0.5%. That was a tougher cut than markets had expected (they'd been predicting negative 0.45% as you can see, that little tenth of a half of a percent makes all the difference).

Anyway, the krona slid as a result, which should keep the central bank happy. The Riksbank has already made it explicit that it views a weak krona as a key part of its goal to boost Swedish inflation.

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How long is it before the rest of the central banks follow suit?

What can a central bank do?

As Jim Edwards on Business Insider points out, this might not be fuelling consumer price inflation. But it's certainly fuelling asset price inflation. Swedish house price growth is running at an annual rate of around 25%. Meanwhile credit growth is running at around 7% a year.

Does that sound like an economy with problems to you? Well, yes but the problem is a property bubble, not low inflation.

The Riksbank has noticed this. But as Katie Martin notes in the FT, "in another familiar refrain, the central bank also once again called on regulators to take action to control rising levels of Swedish household debt".

Quoth the Riksbank: "If no measures are taken, this, in combination with the low interest-rate level, will further increase the risks. Such a development could ultimately be very costly for the national economy."

Gosh. The central bank has figured out that a massive property crash in the future, that could cripple both bank and consumer balance sheets and probably send the economy back to the stone age yet again, would be a "bad thing".

If only the central bank had some sort of lever that it could pull to prevent credit from being too loose. If only someone responsible was in charge of controlling I don't know the money supply, maybe.

I think that perhaps more than any other central bank in the world the Riksbank is demonstrating the huge problem with the amount of responsibility that we've collectively dumped on central banks' shoulders.

In this particular circumstance, the last thing Sweden and its property market needs, is more heavily negative interest rates. The economy is growing strongly. Does the fact that inflation is near 0% really matter that much?

But to be fair, you can also see the Riksbank's dilemma. As Jessica Hinds puts it for Capital Economics, it demonstrates that the bank "is prepared to set aside its worries about a housing-market bubble and strong domestic demand to respond to very low inflation and policy easing by central banks."

And it's going to have to keep going, says Hinds: "With other central banks most notably the European Central Bank (ECB) likely to loosen monetary policy further in the coming months, we doubt that the recent falls in the krona will be sustained".

This is a competition. It's a race to the bottom. And it's getting more brutal by the day.

Wait until the big boys let rip in the currency wars

The Bank of Japan shocked everyone the other week by turning interest rates negative. But while central bank boss Haruhiko Kuroda might have thought he'd made a smart move, it turns out to be nothing of the kind.

US Federal Reserve boss Janet Yellen hinted yesterday that the Fed was probably going to ease back on the throttle for a bit. And as a result of that and as a result of general risk aversion, which tends to send money into the yen the yen has rocketed in strength against the US dollar.

Against the US currency, year to date, the yen is by far the strongest performer up nearly 8%.

That's not part of the plan. Abenomics was founded on a weaker yen, and while the Japanese might have been happy stabilising around the 120 mark, they certainly won't be happy about being around the 111 mark and heading for 100, as we're seeing this morning.

As for the euro a weaker currency there has been part of the game plan for ages too. Dollar parity? Bring it on. Well, that's not going according to plan, either.

Sign our petition to save cash

And negative interest rates are just the start. The Riksbank was one of the pioneers in the thought experiment of banning cash. If you want negative interest rates to work, then you have to stop those pesky citizens from using and hoarding cash.

It sounds outlandish, but don't imagine that it can't happen. As we've mentioned on several occasions, our own Bank of England's chief economist, Andy Haldane, floated it as a good idea last year, and the opinion pages of the FT and Bloomberg have recently contained several pieces on why banning cash is a good idea.

I write a lot more on this in a lot more detail in the next issue of MoneyWeek magazine, out tomorrow. (Subscribe here.)

But if you haven't already, it'd be great if you could sign our petition, asking the government to confirm that it won't scrap cash and to take another look at the remit of the Bank of England.

We're about halfway to the 10,000 mark, at which point the government has to at least respond to our concerns. And if I'm honest, I'm just bursting with curiosity to see what they'd say if you are too, put your name to the petition. Just click here.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.