MNI INTERVIEW2: Risk Swedish Consumption Sinks Rapidly-Breman

Higher rates risk triggering a sudden decline in Swedish household spending, which has so far been cushioned by high levels of savings, Riksbank First Deputy Governor Anna Breman told MNI, adding that the central bank has written to lawmakers to request access to more granular data on households' financial positions.

“Normally it tends to be relatively linear. If you go from zero to one percent, it's about the same as going from three to four percent on the policy rate, but it might be there are non-linearities on the impact on households now that we’re reaching much more restrictive levels [and excess savings may no longer cushion the impact of the hikes]. It does take time for the full transmission of monetary policy to pass through,” Breman said in an interview.

While stressing that inflation risks remain to the upside and that the Riksbank would be more likely to raise than cut rates over the near future, she noted that officials lack data to properly assess the resilience of households. (See MNI INTERVIEW: Hikes More Likely Than Cuts - Riksbank's Breman)

“It's very different across different households. Some households will still have no problems with rate hikes increasing further, some households are already hurting very much, both from inflation of course, but from higher interest rates,” Breman said.

Aggregate liquid savings were already high before the Covid pandemic, and during it some parts of the population were able to further add to financial buffers, she said, adding that the Riksbank is seeking authorisation to access more micro-data on households, with lawmakers proposing amendments to data security protection.

NEED MORE DATA

“We know .. that the distribution is unequal but the extent of it would be good to know,” she said. “We don’t know the resilience of that excess savings from the pandemic and how long that will have an impact on the transmission of monetary policy through the demand channel.”

While a collective wages deal between major unions and employers for a 7% rise over two years has curbed some upside price pressure, Breman noted risks both to upside and downside in the labour market.

“We haven’t seen much wage drift, it has been relatively benign, but you still have the demand channel. So if employment levels remain high, that’s good for demand, but we can still expect inflation to move towards target as the two-year wage agreements imply that wage growth is expected to remain modest,” she said.

Another significant concern for policymakers has been the weakness of the krona, down some 20% from its peak, though Breman noted that any rally in the currency however, might not have an symmetric impact on cutting inflationary pressures.

We “know from pricing behavior that (firms) tend to try to pass on cost increases to consumers, but when … costs are lower for firms, they might not lower their prices, they might not hike them, so that … there tends to be an asymmetry,” she said. "It would be a trend appreciation which would have the most beneficial effect in terms of getting inflation back to target. But now when we see that we are into restrictive territory and demand is clearly weakening it is not at all certain that the pass through from the currency to inflation will still be as strong as it was [when pandemic restrictions were lifted and demand was strong].”