(Corrects 2nd paragraph to show ECB QE 2.3 trillion euros not 1
By Simon Johnson
STOCKHOLM Dec 14 Presiding over one of 2016's
worst performing currencies in the developed world would
normally be an unwanted accolade, but for Sweden's Riksbank it
is a proof its gamble on negative rates and money-printing has
so far paid off.
After being criticised for being too hawkish a few years
ago, the central bank was slated again in March for launching
what was seen as a hopeless currency war against the European
Central Bank's 2.3 trillion euro ($2.45 trillion) "big bazooka"
quantitative easing programme.
The ECB move was designed to lift inflation, partly by
weakening the euro.
Riksbank critics say rates at -0.50 percent and a 245
billion Swedish crown ($26.7 billion) bond-buying programme risk
economic stability, add fuel to an overheated housing market and
leave the bank with little ammunition should inflation stagnate.
But for the moment the Riksbank has gained credibility by
forcing up prices and keeping the crown weaker against its euro
competitor than the ECB's actions might imply.
"Our measures have succeeded in keeping the crown at a weak
level and growth was very good in 2015," Riksbank Deputy
Governor Per Jansson told business daily Dagens Industri on
Tuesday. "We wouldn't have got that result if we had not
followed the policy we have."
The currency has weakened nearly 6 percent against the euro
and 9 percent against the dollar this year - only sterling has
depreciated more. Headline consumer prices rose at their fastest
pace for more than four years in November.
At the same time, while much of Europe is still worried by
sluggish growth, Sweden's economy is steaming ahead.
Growth was 4.1 percent in 2015 and the economy is on track
to expand of more than 3 percent in 2016 - easily outpacing 1.5
percent and 1.7 percent respectively seen for the euro zone.
"You can say that the Riksbank has taught the market a
lesson," said Henrik Unell, currency strategist at Nordea.
It was not always so. Only a couple of years ago, the
Riksbank's credibility was in tatters, with what amounted to a
civil war between hawks and doves on the board over how to deal
with surging household debt.
The doves lost and Nobel laureate Paul Krugman said the
resulting tough policy risked a Japan-style deflationary spiral.
Then came the abrupt policy change.
But there are risks from the negative rates and quantitative
House prices have nearly doubled in the last decade and debt
levels are among the highest in Europe with the EU's financial
risk watchdog the latest to issue a warning about the dangers.
Many Swedes have interest-only mortgages, so pay next to
nothing on a monthly basis and there are also good tax
incentives for ownership. Any change to this could cause sharp
falls in real estate prices, even if there is a housing
"Monetary policy has very little effect on the economy right
now," said Thomas Elofsson, portfolio manager at fund firm
Catella. "On the other hand, it has a very big effect on asset
While inflation is picking up, the strength of the upturn
also remains in question. The Riksbank cut its forecast in
October, but November inflation was still slightly below the
central bank's updated view.
With rates so low and QE set to soak up 40 percent of the
stock of outstanding government bonds for the Riksbank to buy,
it could run out of options should the global economic recovery
Meanwhile, for the currency to boost inflation further to
meet Riksbank targets, it needs to weaken from its current
levels of around 9.74 to the euro, which analysts say are well
above its fair value of around 9.
"What happens in spring if we get a few quarters of
uncertainty and weaker growth in Europe...?" said Anders Eklof,
chief currency strategist at Swedbank. "There is not much more
they can do."
($1 = 9.1679 Swedish crowns)
($1 = 0.9401 euros)
(Reporting by Simon Johnson and Daniel Dickson; Editing by
Niklas Pollard and Alistair Scrutton/Jeremy Gaunt)