Bernanke Peer Quits in Sweden as Inflation Targeting Tested

By Johan Carlstrom 

A former colleague of Federal Reserve Chairman Ben S. Bernanke has given up trying to persuade his fellow central bankers in Sweden to cut interest rates.

Deputy Governor Lars E.O. Svensson’s decision yesterday to quit when his term ends in May was the final chapter in a battle that pitted his pleas to boost inflation and support the labor market against Riksbank Governor Stefan Ingves’s warnings on credit growth. The friction prompted Svensson last month to attack as “poor” the Riksbank’s efforts to reach its 2 percent inflation target. “As long as central banks are trustworthy they will be able to keep inflation expectations low,” Robert Bergqvist, chief economist at SEB AB and a former head of research at Sweden’s central bank, said in a phone interview yesterday. Given credible policy, “monetary expansion won’t create imbalances,” he said.

Svensson, who taught together with Bernanke at Princeton University more than a decade ago, has spent the years since the onset of the global financial crisis arguing that Sweden’s failure to spur inflation has killed jobs. Annual headline inflation accelerated to zero in March from minus 0.2 percent a month earlier and has been below target since January 2012.

Sweden’s unemployment rate unexpectedly jumped to 8.8 percent in March, Statistics Sweden said today. That’s the highest in Scandinavia.

Inflation Overshoot

The departure of the most outspoken member of the Riksbank’s six-member board has added sparks to a global debate on the role of monetary policy. The International Monetary Fund this month urged central banks to do more to stimulate growth, even as record liquidity risks fueling assets bubbles. Ingves, who is also the chairman of the Basel Committee on Banking Supervision, has cautioned against excessive easing, arguing monetary policy can’t ignore household debt growth.

Svensson’s resignation announcement sent the krona soaring as much as 0.7 percent against the euro as traders anticipated a smaller chance of a rate cut. His six-year term expires on May 20. After advocating for lower rates all of last year, he and fellow Deputy Governor Karolina Ekholm were the only two on the board to favor lower rates at a policy meeting last week.

“When unemployment is so high, it wouldn’t be a problem if inflation overshot the target a bit,” Svensson said yesterday. Rather than test deflation, it would be better for the economy to push inflation beyond its 2 percent target “to 2.5 percent, or something like that, to lower unemployment.”

Record Stimulus

As central banks from the U.S. to Europe and Japan have driven interest rates to record lows and experimented with bond purchases to push down long-term yields, some of the world’s richer economies, like Sweden, Norway and Switzerland, have struggled to address household debt growth without fueling currency appreciation.

The krona has gained 5.1 percent on a correlation-weighted basis over the past 12 months. That’s more than any other currency in the basket of 10 developed nations tracked by Bloomberg, except the New Zealand dollar. Household credit growth was 4.6 percent in February, slowing from as high as 11.8 percent in 2007.

Swedish Finance Minister Anders Borg on April 15 cut his 2014 forecast for growth in the largest Nordic economy by 0.8 percentage point to 2.2 percent. He blamed the strong krona and the corrosive effect on demand of Europe’s debt crisis for the revision. Unemployment will rise to an average of 8.4 percent next year, contributing to budget deficits in 2013 and 2014, he said.

Hands-Off Krona

Speaking in Washington last week, Borg said the krona represented a similar threat to Sweden to that posed by the franc to the Swiss economy.

Sweden’s central bank had so far stood out for its declared hands-off stance on the exchange rate. It was an approach that Svensson also criticized, citing the link between currencies and import prices.

Yet even Ingves, who in a February interview said he was “happy” with the krona’s strength, has started to re-assess that view. This month, following criticism from economists at Citigroup Inc.,HSBC Holdings Plc (HSBA) and Nordea Bank AB (NDA) for failing to raise inflation closer to target, Ingves pushed back tightening plans to the second half of 2014. He stopped short of delivering the cut Citigroup, HSBC and Nordea said was needed, leaving the repo rate at 1 percent.

Svensson argued in favor of a cut to 0.5 percent, matching the rate held by the Bank of England, though still higher than benchmarks in the U.S. and Japan.

Sustainable Level

“It’s fully possibly to, in the future, attain the inflation target and also make sure that unemployment comes down to a level that’s closer to a long-term sustainable level,” Svensson, who said the decision to leave the bank was entirely his own, said yesterday. All this can be achieved “without creating any new risks associated with households’ indebtedness.”

Svensson said he had chosen to leave before the Riksbank’s latest rate announcement, opting to wait with his news until after the policy meeting to avoid interfering with the market’s response. Ingves, who cut the bank’s inflation estimates to show it was unlikely to reach its target next year, acknowledged he had expected his policy to deliver price growth sooner.

“We worked through our assumptions when it comes to these things and we concluded that it was time to change,” Ingves said in an interview last week in Stockholm, adding that it wasn’t a technical change to the bank’s models. “Given a thorough internal discussion, this is what we concluded.”

New Way

Knut Hallberg, an analyst at Swedbank AB (SWEDA) in Stockholm, said in an interview last week that the bank’s views are a “change of course” and “a new way of looking at inflation.”

The IMF hosted a conference on growth and inflation targeting last week, urging policy makers to focus more on promoting economic expansion rather than fighting inflation, which it said has been “remarkably stable.”

“Looking to the future, our analysis suggests that ongoing monetary accommodation is unlikely to have significant inflationary consequences, as long as inflation expectations remain anchored,” the IMF said.

The Washington-based lender last week cut its global growth forecast and said European policy makers should deploy “aggressive” monetary policy amid a second year of contraction in the euro area. The global economy will expand 3.3 percent this year, less than the 3.5 percent forecast in January, after 3.2 percent growth in 2012, the fund said last week, cutting its prediction for this year a fourth consecutive time.

Natural Debate

In Norway, Europe’s second-richest nation per capita after Luxembourg, the central bank signaled last month it was willing to cut rates again after a jump in the krone had pushed inflation below 1 percent. The current debate on growth is natural given the state of the world economy, Governor Oeystein Olsen said in an interview last week.

“In a situation where inflation isn’t a problem, while there are big problems in the real economy, unemployment and avoiding a downturn in the economy are a big focus,” he said in Oslo. “When we’re out of the crisis at some point, and inflation rises a little, it’s just as probable that today’s systems are as appropriate.”

Norway has cut rates twice since December 2011, after tightening in 2009, 2010 and 2011. The Riksbank also raised rates as recently as July 2011, before reversing course in December that year.

“It’s better to change when you have concluded that things have changed, compared to not change,” Ingves said. “In the real world focus changes constantly.”

To contact the reporter on this story: Johan Carlstrom in Stockholm atjcarlstrom@bloomberg.net

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