Riksbank’s policy dilemma

April 29, 2015

Riksbank Governor Stefan Ingves attends a forum organized by Mexico's Central Bank in Mexico City

Sweden’s central bank delivers its latest policy decision with many analysts expecting a further interest rate cut and an expansion of its new bond-buying programme, reflecting its fear of deflation despite solid economic growth.

The central bank has slashed its benchmark interest rate to a record low of -0.25 percent after two years of flat or falling consumer prices.

All but five of 22 analysts in a Reuters poll expect the Riksbank to cut rates with the median pointing to a further easing of 10 basis points. The bank is also seen expanding its bond-purchasing programme by as much as 50 billion crowns ($5.8 billion), adding to the 40 billion of purchases already planned.

The Riksbank is worried about deflation becoming entrenched but quite why it is so alarmed when growth is rattling along at about 2.5 percent and it faces a frothy housing market is not clear.

Sweden has tried various ways in recent years to let the steam out of the property market, but prices have kept rising. Negative interest rates are not going to help the situation.

Euro zone M3 money supply data will make for interesting reading now that the European Central Bank’s money-printing scheme is in full swing.

The ECB intends to buy more than 1 trillion euros of assets over 18 months to push inflation up and in the hope that banks will use the cash to lend more. The M3 data may show lending to the private sector has turned positive for the first time in eons.

German inflation figures will cue up the euro zone number on Thursday. It’s too early yet for a noticeable pick up though late in the year, when the base effects from the oil price fall which has now partially reversed drop out of the system headline inflation will increase regardless of anything else.

The German rate is forecast to have ticked up to 0.2 percent while the number for the whole currency bloc is seen at zero, still way below the ECB’s target of close to but below 2 percent.

Globally, the Federal Reserve’s policy decision will eclipse all else. There is no question of the Fed raising rates from record lows yet but the language of Janet Yellen and co. has ample power to move the markets if they nod one way or another. The chances of a hike at the June meeting, while still on the table, have decreased after a some weak first-quarter data.

The head of Germany’s Bundesbank criticised Greece’s government for failing to implement reforms and said it was possible for a country within the currency union to become insolvent.
Jens Weidmann also said the euro zone had become more resilient to economic shocks than before the financial crisis, so that the threat of contagion had dwindled.

After Greek premier Alexis Tsipras sidelined his combative finance minister from bailout negotiations and said he wanted a reforms-for-funds deal struck by May 9, there are reasons for hope.

Weidmann’s remarks reflect ongoing misgivings that an agreement will be pulled from the fire and also a growing argument that even if Greece did default it would be better dealt with within the currency bloc rather than allowing it to leave.

Whatever transpires, there is no sign of contagion to other euro zone bonds, not least because the ECB is buying so many of them.

Today, Italy will auction up to 8.25 billion euros of five-, seven- and 10-year bonds. Italy paid nothing to sell six-months bills at a debt auction with the lowest accepted yield falling below zero for the first time ever.

After data showed British growth at its lowest level in more than two years, Prime Minister David Cameron will pledge not to increase taxes for the five-year lifetime of the next parliament if he wins May 7 elections.

That may play with the electorate – though few promises from either side have gained traction yet – but no one can accurately predict what’s going to happen between now and 2020, not least since Cameron is promising a referendum which could see Britain leave the EU.

If things turn sour, and his tax pledge is adhered to, it would require more savage public spending cuts than are already pencilled in.

Labour leader Ed Miliband will counter with a well-worn theme — that Britons’ living standards have not been lifted by economic recovery – and pledge to increase tax credits for the lowest paid.

Iranian patrol boats intercepted a cargo ship in the Strait of Hormuz and forced it into Iranian territorial waters, prompting the U.S. Navy to send a destroyer and reconnaissance plane to monitor the situation.

The action occurred amid heightened tensions over Yemen, where a Saudi-led coalition supported by Washington has been bombing Iranian-backed Houthi rebels, who have seized much of the country.

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