SPP, the Swedish manager that is part of Norwegian insurance group Storebrand, has warned in its latest monthly note that the rates policy being pursued by the ECB poses a longer term threat to a sustainable balance between credit demand and supply in Europe’s open and export orientated economies such as Sweden and Norway.
The manager says that local monetary policy is affected by what the ECB is doing, because of the related developments in international currency markets, which in turn create consequences for imported inflation and levels of competitiveness.
“Interest rates in both countries [Norway and Sweden] have therefore followed the downward trend overseas, even in periods when economic development have not been as weak as they are overseas. An unwelcomed effect has been increasing credit growth and rising residential property prices, and there is concern that this could create imbalances in the long term. Different approaches in monetary policy have been tried without any substantial impact on developments,” SPP warns.
“Both countries’ financial regulators have developed greater impact in this area and have proposed new measures to dampen developments in the property market. One of the proposed new measures is to demand amortisation of loans for those with high loan ratios. If this proposal is pushed through it could contribute to dampening the growth in houshold debt, despite expectations that interest rates will remain low over a longer period.”
One of the effects of the ECB’s interest rate policy has been to persuade SPP to go underweight in Swedish government bonds.
It notes that the asset class rose by almost 2% in March, at a time when the Swedish Riksbank surprised the market with a cut to its key interest rate to -0.25% and increased its own bond asset purchasing programme.
“Even if the economy is doing well, the Riksbank is concerned about the ECB’s bond purchases.”