MNI POLICY: Riksbank Stability Report Shows Rate Hikes Biting

-Financial Stability Report Flags Up High Household Debt, Rate Sensitivity

By David Robinson

     LONDON (MNI) - Sweden's high levels of household indebtedness and their

sensitivity to any increase in interest rates remains a stability risk, the

Riksbank's latest Financial Stability Report highlighted. 

     The following are key points from the report published Wednesday:

     -The report stated that "high household indebtedness forms the greatest

risk" to financial stability and the Riksbank's accompanying data highlighted

household's vulnerability to rising interest rates and any decline in property

prices.

     The aggregate household debt-to-income ratio is rising. It stands at just

over 185 per cent and the Riksbank said that it expects it to grow to over 190%

over the next few years. Riksbank data showed that 31% of households have a

debt-to-income ratio in excess of 400%. These figures are high in comparison to

other advanced economies. UK budget forecasts, for example, show the household

debt-to-income ratio remaining below 150%. 

     -Swedish borrowers typically have variable rate mortgages, ensuring that

any policy rate hike by the Riksbank is likely to passed through rapidly. The

Riksbank looked at the implications of raisings the repo rate to 0.5% and on up

to 2.0%, with the interest rates paid by households rising by more than two

percentage more than this, to 2.5% to 4.0%. These Riksbank projections showed

that it interest moved up in this way "households' interest expenditure would

more than double."

     -The Riksbank does not have direct control of financial supervision, with

the Ministry of Finance and Finansinspektionen (FI) responsible for the

supervision of financial institutions. The Riksbank expressed concern about

mounting financial risks and recommend that FI should set a Liquidity Coverage

Ratio (LCR) for the major Swedish banks in all significant currencies. An LCR

sets requirements on liquid assets held by the banks to meet short-term

obligations. It also called on FI to introduce a 5% leverage ratio on the major

Swedish banks.

     -The Financial Stability Report looked at risks from international

developments, including from rising protectionism globally, the knock-on effects

of rising U.S. interest rates and the possibility of a disorderly Brexit. The

report said that "uncertainty in the global economy remains high. The risks are

deemed to be slightly greater than in the spring." With Swedish banks dependant

on international financial markets, they risks facing more expensive funding or

even disruption to funding, which in turn would feed through to more restricted

and more expensive lending to Sweden's highly indebted households.

     -Following a prolonged battle of ideas, in which former Deputy Governor

Lars Svensson was prominent, the Riksbank has moved away setting its policy rate

in response to stability concerns. Nevertheless, the likely reaction of

households to tighter policy is something the Riksbank's Executive Board has to

factor in and the stability report bolsters the case for a cautious approach to

tightening.

     The board has previously stated that the first hike is likely in December

or February, with the October minutes noting Governor Stefan Ingves talking

about "a cautious normalisation of monetary policy" and adding that "households'

increasing debts have long been a great source of unease."

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com