Europe | Monetary Policy & Inflation
The divergence of monetary policy in Norway, Canada, and now possibly Sweden from that of the rest of the world over the last twelve months is stark. While almost every other central bank has turned dovish, the Norges bank has hiked four times since September last year while the Bank of Canada has hiked five times since mid-2017. And the Riskbank in its October meeting pretty much guaranteed a hike at its 19 December meeting. Looking strictly at economic activity, it’s questionable whether these hikes are warranted.
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The divergence of monetary policy in Norway, Canada, and now possibly Sweden from that of the rest of the world over the last twelve months is stark. While almost every other central bank has turned dovish, the Norges bank has hiked four times since September last year while the Bank of Canada has hiked five times since mid-2017. And the Riskbank in its October meeting pretty much guaranteed a hike at its 19 December meeting. Looking strictly at economic activity, it’s questionable whether these hikes are warranted.
Despite a spike in underlying inflation in early 2019 – something Norges actually expected to be temporary – inflation is returning back towards 2%. And both Canada and Sweden’s inflation rates are below 2%. Growth in all three countries has actually been more elevated than in Europe, though not necessarily compared to the US. But growth was never the reason their respective central banks cut rates before, and it doesn’t seem to be the reason they are now hiking them. In fact, looking at weakening domestic demand and rising unemployment rates in Sweden, there are probably more reasons to cut now than hike.
So why are they hawkish? One theory is that the central banks are worried about rising household leverage with private debt to GDP in each country close to the highest in the world. The thing is, other countries in a similar situation have chosen to go the opposite way. Australia, New Zealand, and Korea (which also have high household debt ratios) tried to be ‘hawkish’ but have been aggressively cutting over the last twelve months on the back of slowing global demand.
The problem with hiking rates when over-indebtedness is high is that you are ‘inviting’ financial instability. And when stability is one of your mandates, it is an unwise choice. So is that why the Riskbank has said it would hike only once and stop at 0%?
Of course, at least in the case of Sweden, it could be more of a symbolic move from negative rates to zero. After all, the Riksbank was the first modern central bank to go below it ten years ago. Who knows, but it is more likely to be part of the experimentation process. Ultimately, it could be premature and a policy mistake.
Anton Tonev is a former HSBC & Morgan Stanley researcher & trader with more than 20 years of experience across New York, London & Asia. His focus lies in Global Macro asset management with an Emerging Markets undertone based on risk factor investing, core trends, non-conventional economics and cross-discipline ideas.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)