Published: January 30 2011 18:10 | Last updated: January 31 2011 09:47
Sweden is beginning to look like western Europe’s very own emerging market, at least on the surface. After a deep recession it is growing again at a rapid clip. The authorities are also fretting about bubbles and squirming as the Swedish currency appreciates. But while central banks in countries such as Indonesia and Turkey are resorting to imaginative monetary policymaking measures to ward off the effects of such unwelcome developments, Sweden’s central bank is firmly old-school.
The Riksbank has increased interest rates steadily from 0.25 per cent last summer to 1.25 per cent. There is some dissent among the bank’s decision-makers about this course of action, however.
Two Riksbank members voted against the latest rate rise on the basis that, if Swedish interest rates diverge too much from those in the rest of the developed world, foreign currency flows will push up the krona and harm exports. The currency has risen by almost a tenth against the euro since the summer.
The dissenters are worrying about a risk that has yet to materialise. Exports are still strong, and the country’s trade surplus is widening. But the risks that come with strong growth and a negative real interest rate (the inflation rate is 2.3 per cent) are already apparent. Swedish house prices rose through the recession; homes in Sweden are now among the most expensive in the developed world in relation to household disposable income.
The average household debt is 167 per cent of disposable income, though low interest rates make the debt burden on households feel light. In the US, the debt-to-disposable income ratio peaked in 2007 at about 135 per cent. Household borrowing slowed slightly in December but is still rising at an 8 per cent annual rate.
The Swedish government is fighting back; it has limited new mortgages to 85 per cent of a property’s value. Monetary policy should keep pulling in the same direction. Old-school tightening does not hurt half as much as an old-school bubble that gets out of hand.