State of the Art Monetary Policy In Sweden

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Animated by yesterday’s export driven PMI result, Sweden takes poll position in quantitative easing and commits to keeping 0.25% rates on hold till the end of 2010. Mind you, they are lucky enough to have Princeton economist and avid deflation fighter Lars Svensson in there on the board to steer them through all this. Good for Swedish growth, Krona negative, great for exports. Let’s go, let’s go, let’s go.

Sweden’s central bank cut its key interest rate by 25 basis points to a new record low of 0.25 percent in a surprise move on Thursday, and said it would offer one-year loans to banks to foster lending. The Riksbank said it expected interest rates to remain at that level until late 2010. Deputy Governor Lars Svensson disagreed with the decision and advocated a cut to zero. Nearly all economists in a Reuters poll had expected the Riksbank to keep rates on hold at 0.5 percent, in line with a previous central bank forecast that suggested rates would stay around that level at least until early next year.

“The repo rate is expected to remain at this low level until autumn 2010,” the central bank said in a statement. “The Riksbank’s assessment is that after cutting the repo rate to 0.25 percent it will have reached its lower limit in practice, and that the situation on the financial markets is still not completely normal. “Supplementary measures are necessary to ensure that monetary policy has the intended effect.” Those measures entailed offering 100 billion crowns’ worth of loans to the banks at a fixed interest rate and a maturity of 12 months. “This should contribute to lower funding costs for the banks and lower interest rates for companies and households,” the Riksbank said.

The reaction on the Krona front was swift:

The Swedish krona fell against the euro after the country’s central bank unexpectedly cut its main interest rate. The krona weakened 0.6 percent to 10.7868 per euro as of 9:32 a.m. in Stockholm. The Swedish currency depreciated 0.9 percent to 7.6527 against the dollar. The Riksbank lowered its main rate by a quarter of a percentage point to 0.25 percent. All but one of 17 economists surveyed by Bloomberg forecast no change.

Some people have been saying in response to warnings that this recovery will be export lead, “exports what exports”? What a load of tripe! Without exports there will be no recovery. The next lesson in abc economics: in times of crisis relative currency values matter more. And to prove it, Swedens PMI just poked into the growth zone, 50.5, following 43.7 last month. The 17% odd devaluation with the euro would have nothing to do with this, would it? Welcome Sweden, the worlds fourth 50+ PMI.

This entry was posted in A Fistful Of Euros, Economics: Country briefings, Economics: Currencies by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

8 thoughts on “State of the Art Monetary Policy In Sweden”

  1. It’s mostly the advantage of being a small countries. Nobody really cares whether Sweden devalues or not. So, are there any lessons to learn for the big economies/economic blocks? Probably not.

  2. Do I take from what you say that countries that didn’t join the euro are at a competitive advantage because they can competitively devalue? So why did any of them join (and is there any point in the UK thinking about joining, in your view?)

  3. So let´s see.

    The Chinese Yuan and the Japanese Yen were already undervalued in the past.
    Now the British Pound and the Swedish Crown follows.

    Now what happens if the US Dollar and the Euro follow too? According to you devaluing the currency is just the most important thing!
    Why shouldn´t they follow your advice too?
    Race to the bottom anyone?

    Without exports there will be no recovery. The next lesson in abc economics: in times of crisis relative currency values matter more.

    Let´s all devalue!

  4. Does really someone think that the Swedish central bank can have an effect on the economy where in fact the issue is global?

    I m astonished to read this morning lots of article talking up the decision of the central bank…It’s a farce, isn’t it?

    Now I will be harsh with the central and the way it conducted regulation of its financial system in the past 5 years…they were just blind and seem to have learn the wrong lesson from the 1990’s crisis as now their banking system has been quite heavely messing up in Eastern Europe.

  6. can you please explain how a 0.6% currency devaluation will give greater than 0.6% pricing advantage to swedish exporters?
    is this all the swedish economy needs to become the favored exporter the world over?

  7. and just to be fair: for the past week, the daily EUR/SEK fluctuations have always been greater than 0.6% with a few over 2%!
    your post sounds alot like competitive devaluation sensationalism.

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