Dust off the Paul Krugman jokes – the “sadomonetarists” in Sweden have exited negative rates.
That’s a reference to Paul’s cartoonish 2014 blog post in which he famously accused the Riksbank of being a bunch of prosperity-hating heretics for hiking rates in and around the European debt crisis. Sweden, Krugman lamented, went from “rock star of the recovery” to “Japan”, and all thanks to “a classic case of sadomonetarism in action.”
He needn’t have fretted. The “sadomonetarists” subsequently abandoned their sadomonetaristic tendencies on the way to NIRP.
Fast forward seven years from the hikes Paul hated so much (and four years from the blog post in which he declared that hatred), and the Riksbank hiked rates for the first time. That was a year ago almost to the day.
Until Thursday, that lonely uptick in the repo rate was the only movement on the EKG. Now, there’s another. As expected, the Riksbank hiked at their December meeting, bringing the policy rate back to zero. Every economist surveyed knew this was coming – the bank telegraphed it well in advance.
Last December, we noted Sweden was “hiking now because they know the window is closing”. At the time, the rate path was more dovish than expected. Two months later, at the February meeting, the bank came across as inexplicably hawkish despite the unfolding dovish pivot by its global peers. The rate path was unchanged, meaning a September hike was still a theoretical possibility. “Slightly hawkish doesn’t work right now”, we chided.
Fast forward 10 months and the Riksbank did manage to squeeze in the hike, noting that inflation “has been close to the… target of 2% since the start of 2017, and the Riksbank assesses that conditions are good for inflation to remain close to the target going forward”. The repo rate will likely remain at zero “in the coming years”, the bank said. QE will continue through the end of 2020. Deputy Governors Anna Breman and Per Jansson entered reservations.
Governor Stefan Ingves said the negative rate, in place for a half-decade, “worked well on the whole”. “Inflation will remain close to our target on the back of the monetary policy we’re conducting”, he mused, at the press conference. (Switch to terminal mode to watch an interview with Ingves).
The krona chopped around, but the fact that everyone knew this was coming left little room for upside.
Goldman said Thursday that the krona “is now our preferred long in G-10 FX”. The rate hike and accompanying rationale “reveals an aversion to negative rates that should also help support the currency, and SEK depreciation in recent years has put the economy in a better position than many of its peers”, the bank said.
Invariably, some will assess that today’s move was ill-timed, coming as it does against a backdrop of still shaky global growth, subdued inflation and lingering trade uncertainty. But expectations of no excitement in the years ahead may mute that criticism. “Conclusion: expect highly expansive and highly boring Swedish monetary policy in the coming years!” Johan Javeus, chief strategist at SEB exclaimed. “Yaaawwn…”, he went on to tweet.
Danske’s Michael Grahn called the decision “expected but incomprehensible from an inflation target point of view”.
“With no reference to the strengthening SEK, this will make it harder to achieve the inflation target. Decision still lacks a strong justification”, he said, adding that the Riksbank’s reference to behavioral economics is a “very thin” rationale.
“The Riksbank’s commitment to a hike, at a time when Sweden has also been negatively affected by the global manufacturing-led slowdown, is sometimes seen as counter-intuitive”, Morgan Stanley wrote this week. “However, from a cyclical standpoint, Sweden is an economy with a positive output gap and inflation not that far from target”.
SocGen’s Kit Juckes notes that “the Riksbank’s economic forecasts do nothing to indicate the start of a hiking cycle”. GDP growth forecasts “are unchanged at 2% for 2020, up 0.1% in 2021 to 1.7% and up 0.15 in 2022 to 1.9%”, he adds, on the way to noting that the repo rate is forecast at zero in 2020 and 2021. Inflation is forecast at 1.8% in 2019-2021, rising to 2.1% in 2022. “None of this is intended to challenge the view that they feel the side-effects of negative rates are too high a price to pay, and monetary policy is now on permanent hold”, Juckes went on to say.
“All in all, today’s message from the Riksbank was mainly as expected but is, if anything, a tad hawkish”, Nordea said, in a note. “The Riksbank [cites] economic reasons, but much suggests that they rather hiked for technical reasons, addressing risks of adverse effects on the economy of very low interest rates”.
Finally, Nordea’s Martin Enlund reminds you that really, the headlines are somewhat misleading. “Did the Riksbank just end the Swedish era of negative rates?”, he asked, rhetorically. “Nope. SGB yield curve remains subzero up until 10y”.
Technically speaking, though, the key rate is out of the proverbial hole. That leaves Denmark, Switzerland, the eurozone and Japan as the only locales with negative policy rates.
Now we’ll all wait on Paul Krugman to fire up his laptop and update the world on “sadomonetarism in action”.