Sweden’s central bank warns of real estate ‘accidents’ in bid to curb inflation

GENLI.ORG

Bloomberg | | Posted by Yagya Sharma

Sweden’s central bank will do what is necessary to bring inflation back to its 2% target, even if it inflicts pain on the economy and leads to “accidents” in the country’s property sector, according to Riksbank Governor Stefan Ingves.

The Riksbank has implemented record rate hikes in response to inflation at a three-decade high, and expects to continue increasing borrowing costs. Those measures are weighing on housing prices, which have dropped by more than 11% since March, and are also putting pressure on the country’s commercial property sector.

“I would be surprised if there isn’t any accident, somewhere, as rates increase,” Ingves said at a parliamentary hearing in Stockholm. “We have to live with that, given that the inflation target is what it is.”

The bank is projecting an 18% drop in housing prices from the peak, and Deputy Governor Per Jansson, who also participated in the hearing, said the central bank will closely follow developments in the sector.

“We can see that the drop in Sweden tends to be rather steep compared with other countries, possibly because we have a significant rate sensitivity,” Jansson said. “Our purpose is obviously not to bring about any economic collapse, so you always have to take various developments into account and calculate what the effects may be on consumption, for example.”

The officials stressed to lawmakers that the Riksbank’s success to some extent is dependent on fiscal policy not undermining its efforts.

“There is no cost-free way out of this — no magic tricks — but there are different ways back to normalcy,“ Jansson said. “The cheapest way is to take joint responsibility, thereby being able to raise the rate as little as possible.”

Additional comments:

  • Ingves said it would be “inappropriate” to halt the requirement for mortgage borrowers to amortize. “We have the eyes on the world on us, and we have a huge market for mortgage bonds. Fiddling with the systems now would be tantamount to shooting yourself in the foot, because we are already, since long, in dangerous territory”
  • On inflation expectations, Ingves said that if they rise, it will take time for them to fall back, which speaks in favor of acting in the near term
  • Jansson added that it is easy for the central bank to lose confidence, and very costly to recreate it. “That has to be done by taking action; there’s no other way,” Jansson said
  • Ingves also said the real rate will need to be somewhat positive in the near term. In the long term, he said, “we don’t know where real rates are headed, and what nominal rate that will lead to”

Leave a Reply