If you met a central banker these days, what would you ask him? I would definitely opt for: “Think carefully before raise interest rates. And remember what happened in Sweden".
In fact, there is a heated debate about a possible one interest rate hike between central bankers, officials, economic observers, international organizations. Mark Carney, Governor of the Bank of England (BoE) said interest rates could rise sooner than markets might expect. The Fed he has expressed his intention to keep interest rates low at least until next year; although several officials within it believe its governor Janet Yellen should not keep the promise given. The Bank for International Settlements (BRI) showed concerns that a long period of low interest rates could do more harm than good if it favors a reckless financial activity. But there are also those who warn of the risks that a sudden increase in interest rates brings with it.
Let us then review the reasons for yes and no to rate hikes and the Swedish experience.
The reasons for yes
- Long low rates fuel the risk of a rising inflation in the USA and the UK.
- The low cost of money is creating financial bubbles, which could generate another financial crisis. This concern is also particularly felt among small savers on our site Advise Only, where these and other topics are often discussed.
The reasons for not
- The excesses on the markets are limited.
- Controlling financial bubbles using macro-prudential tools (eg banking regulation of banks' capital against risky loans) is better than swinging interest rates.
- A sudden rise in interest rates could endanger the real economy, causing recession and deflation (see the case of the Swedish economy).
According to those opposed to the rate hike, the concerns related to leaving them low are well founded, but excessive.
- Inflation? In both America and Britain, inflation is below the target of their respective central banks. In the UK the unemployment rate fell but the wage dynamics is weak and it does not suggest a wage-price-wage spiral. In America, growth is uncertain and the FED continues to forecast that inflation will remain below the 2% target for a few more years.
- Financial instability? Market excesses are still small compared to the buoyancy of 2007. The UK housing bubble is largely confined to London. And banks in the US and UK sit on a liquidity and capital cushion that makes them less vulnerable to falls in asset prices.
What does Sweden teach savers?
Sweden's central bank, the Riksbank, was the envy of central banks. His country's economy was growing three times faster than the eurozone in 2010 and managed to avoid Europe's double-dip recession in 2012-2013.
However the economy was still recovering from the Great Recession when in July of the 2010 the country's central bank decided to raise interest rates, confident in the recovery but worried about the risks of growing household debt and an increase in house prices. At the time the unemployment rate was at 8,2% and the inflation rate to 1,1% (below the central bank's inflation target).
Da end of 2011,inflation began to decline rapidly and the economy to embark on a path that would soon lead to inflation rates equal to zero and sometimes negative.
today Private sector debt to GDP ratio is higher than in 2010, the house prices they continue to fall and the central bank is struggling to contain hotbeds of economic pessimism, so much so that someone wonders if Sweden can be considered the Northern Japan.
From the Swedish experience savers can learn a lesson: Tightening monetary policy in an economy with uncertain growth can lead to a long period of low interest rates.
