MNI INTERVIEW: Riksbank Head Sees Turbo-Charged Policy Biting
MNI (STOCKHOLM) - Sweden has "turbo-charged" monetary policy, with the effects of rate cuts coming through faster due to high household debt and floating rate mortgages, and with early signs of declining savings and rising consumption, Riksbank Governor Erik Thedeen told MNI after indicating that the easing cycle may have ended.
The Riksbank Executive Board cut its policy rate by 25 basis points at its January meeting to 2.25% in a unanimous decision, with Thedeen and the board's guidance avoiding any steer towards a further cut. Thedeen told MNI that inflation risks may have moved to the downside since December but that growth risks were balanced, with the Riksbank foreseeing a pick-up in activity this year as previous cuts feed through.
The Swedish central bank has eased more aggressively than its peers, cutting by 175 basis points since May to take the rate down to the middle of its estimate of the long-run neutral level between 1.5% and 3%.
"Monetary policy in Sweden is substantially more effective than it is in countries with lower debt levels in the private sector, and also where they have fixed mortgages, typically what you see in France and Germany. So I think, in that sense, we have a very effective, sometimes turbo-driven monetary policy," Thedeen said.
"For sure, we have ...already seen some effects of it ...mortgage rates are going down as we speak.”
Asked how things had changed since December, when he had stressed that risks were balanced, Thedeen said there was maybe a little bit more downside risk on inflation, but that growth risks were more equal. It would be easy to imagine that the economy could grow more slowly than expected, while inflation, currently below target, moved up or down, he added.
CONSUMPTION BOOST
The savings ratio provides a key policy uncertainty, with the data hazy. While the short-term effects of rate cuts are clear, longer-term impacts, such as on corporate investment decisions and on desired household saving, are less certain.
"What kind of savings decision will households take here because of the uncertainty? They might say, ‘Well, I would do more precautionary savings because of the Ukraine war, because of Trump or whatever.’ We don't know, but given the fairly sharp uptick in real disposable income, there should be some [extra] consumption coming into the Swedish economy, more pronounced in the first half year than we've seen so far," Thedeen said.
Early indicators, such as retail sales and purchases of durable goods and stable turnover from importers, all support the view of a demand pick-up, but "we need to have more firm data [so] that we actually see this turn around," he said.
"Savings data is extremely uncertain ... but we have maybe seen a little bit of downtick .. from a very high level. So I think that's an indication maybe that more and more (savings) are going to consumption, but we still have a fairly high savings level in the household sector, and ... it's very unevenly distributed," Thedeen said.
LESS DISSENT
The board's December minutes showed members debating the merits of cutting rates early before the economic pick-up became more pronounced, or of waiting until later in the first half, but there were no dissenting votes at the January meeting. This continued a pattern of voting harmony established under Thedeen's leadership since he took over two years ago, unlike voting patterns on previous boards.
Thedeen said that he did not "pre-judge that it's better to have no dissent, or one dissent or two dissents."
"I wouldn't point to my leadership. I would rather point out that ...individuals differ, and some people are more prone to dissent than others, and then maybe we have a board that is a little bit less prone to that than some of the [previous ones] … but time will tell ..This is two years now, so we'll see how it looks after four years," he said.