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The Swedish model

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Until about six months ago, Sweden was routinely trotted out as an example of a modeleconomy (not least by Sweden itself). But now it’s time to start talking about Swedish deflation. In March, the economy’s consumer prices were down was down 0.6% from the previous March, following a -0.2% CPI inflation rate in February. CPI inflation has been hovering around zero since November 2012.

The Swedish economy has been locked in an epic hawk/dove battle for more than three years. Between 2010 and 2011, the central bank increased interest rates to 2% from 0.25%. It quickly began lowering rates again in fall 2011, most recently cutting the rate to 0.75% from 1% (where it had been for a year) in December. The central bank wrote in its April report that it expects to keep rates unchanged for the next year, as “inflation has been weaker than expected for some time”.

The hawks, including the central bank’s governor, worried if the Riksbank did not raise rates in 2010, inflation would take off. Inflation has been low for some time, yet interest rates are still high relative to the negative rates former deputy governor Lars Svenssonhas called for (while still at the central bank, he was a force behind its innovativenegative interest rate policy back in 2009). The reason rates remain high, writesAmbrose Evans-Pritchard, is that the Riksbank “has been trying to ‘lean against the wind’ to curb house price rises and consumer credit, pioneering a new policy that gives weight to the dangers of asset bubbles”.

Alen Mattich reports that housing prices are up 70% from where they were in 2005, with rents up 30%. But the country is also dealing with a significant housing shortage, writes the WSJ. For all that Sweden is “a country with a small population but vast tracts of land”, as Mattich puts it, its population is booming due to immigration, and getting new housing built in the cities is a bureaucratic nightmare. According to the WSJ, Stockholm needs 17,000 new homes a year through 2030 to keep up with population growth. Between 2000 and 2012, the city only managed to average 7,250.

from Breakingviews:

Central bankers live in silent fear

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s scary to think what higher policy interest rates might do to a financial system habituated to virtually free money. Central bankers, though, profess not to be too worried about this risk. They are either overconfident - or living in silent fear.

from MacroScope:

Is it time for the ECB to do more?

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From financial forecasters to the International Monetary Fund, calls for the European Central Bank to do more to support the euro zone recovery are growing louder.

With inflation well below the ECB’s 2 percent target ceiling and continuing to fall, 20 of 53 economists in a Reuters Poll conducted last week said the bank was wrong to leave policy unchanged at recent meetings and should do more when it meets on Thursday.

from Counterparties:

MORNING BID – Hi Janet, Here’s a Selloff.

Welcome Madame Chair, here's a market selloff for you.

Fed Chair Janet Yellen made some news that she didn't expect yesterday. She perhaps thought she was offering some clarity when she answered the question from Reuters' Ann Saphir as to when the Fed might start raising interest rates. That's not how it worked, although at least in this case she didn't mouth off to Maria Bartiromo the way Ben Bernanke did eight years ago.

What we didn't see in her answer on the distance between the end of QE3 and the first rate hikes of "six months" (or something like that), is whether we will start to see any kind of reaction from the primary dealers surveyed by Reuters yesterday.

from Breakingviews:

ECB needs cunning plan to join currency wars

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By Swaha Pattanaik

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The euro is at two-and-a-half-year highs. Its strength risks driving ultra-low inflation even lower. The European Central Bank may be squeamish about blatantly targeting a weaker euro. But it need have no qualms about picking monetary policy tools that maximise damage to the single currency.

from Counterparties:

Slacktivist monetary policy

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

How much slack is there in the labor market? That is, how close is the American labor market to full employment? The answer to that question is important, says Evan Soltas, because estimating whether the economy is near its potential affects what, if anything, policymakers actually do to help the economy. No one is quite sure, but Paul Krugman argues against the emerging consensus that says “even though we still have huge unemployment, we’re actually running out of employable workers”.

from Breakingviews:

Just ditch forward guidance

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Central banks’ forward guidance provides modest gains with significant risks. That judgment, already common among economists, has just received an authoritative endorsement from the Bank for International Settlements. The implication is that this policy experiment should be abandoned.

from Global Investing:

Will Lithuania fly like a hawk or a dove at the ECB?

No one will really know how Lithuania will impact European Central Bank monetary policy until the country gets a seat at the table. That is expected to happen in 2015, provided the last of the three Baltic nations meets the criteria to become the euro zone's 19th member. We'll all find out in early June.

The ECB's monetary policy remains at its loosest (main refinancing rate is just 0.25 pct) since the bank assumed central banking responsibilities for the euro area 15 years ago. My Frankfurt-based colleague, Eva Taylor, explained earlier this month that the addition of Lithuania will change the voting patterns of the ECB, curbing smaller members' perceived influence and giving more weight to the center.

from Breakingviews:

G20 can get past angry stares and platitudes

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The G20 risks becoming a particularly pompous talking shop. As finance ministers and central bankers from the world’s largest economies gather for their weekend summit in Sydney, Australia, they might plan to get out of a potentially dangerous rut.

from Anatole Kaletsky:

Yellen looks toward a Keynesian approach

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This has been a banner week for the world economy, inspired largely by events in the United States.

In Washington, the first congressional testimony from Janet Yellen in her position as new Federal Reserve Board chairwoman reassured and impressed two notoriously petulant audiences: Tea Party congressmen, who had assembled a posse of hostile witnesses to attack the Fed’s “easy money” policies; and panicky Wall Street investors, who had spent the previous month swooning on fears that monetary policies might not be easy enough.

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