Poor coordination between policy makers is causing economic headaches in Sweden, according to local bank SEB, which has once again cut its forecast for interest rate rises even as it predicts growth will continue faster than its “already optimistic” predictions.

In its quarterly economic outlook, released today, SEB said “a lack of coordination and cooperative spirit between different economic policy making bodies is becoming more and more problematic”.

Sweden’s economy has been expanding at a healthy pace, and SEB increased its forecast for economic growth in 2018 from 2.4 to 2.6 per cent. It added that there is a chance of even stronger growth, judging from some sentiment indicators. Its 2017 growth forecast remains at 3.1 per cent.

The mix of upbeat growth and sub-zero interest rates has led to fears of overheating in some sectors, with house prices and consumer debt levels rising rapidly as buyers take advantage of the Riksbank’s stance. The country’s Financial Supervisory Authority has pushed for the Riksbank to factor housing market risks into its decision-making, but to no avail. For its part, the Riksbank frequently calls for tougher action on the sector from government supervisors. Check mate.

The central bank’s singular focus on inflation, which has ticked up in recent months but remains relatively weak, means it has shown no sign of ending its stimulus measures. Last month a divided Riksbank board shocked markets by extending its quantitative easing programme into the second half of the year, and pushing back its own forecast for rate rises.

As a result, SEB has pushed back its forecast of a first rate hike into 2018, and now expects the repo rate to remain at or below zero per cent until past the end of next year.

The lift to growth in Sweden comes amid a generally brightening global outlook, according to SEB, which notes that:

There are still good reasons to pursue expansionary monetary policy, but it is becoming increasingly difficult to find arguments for its more extreme expressions such as negative and zero interest rates and large securities purchases. The risk picture has changed: the deflation risk has decreased significantly and downside risks to growth have faded.

The bank raised its forecast for global GDP growth for this year and next, with improving prospects across Europe, China and Japan. However it trimmed its predictions for growth in the USA, noting that while Donald Trump’s relatively “pragmatic” approach since taking office will be a “relief” for other countries, it has reduced the chance of a spending-induced boost to domestic growth.

Photo: Bloomberg

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