Does the Interest Rate Weapon Still Work?

The Swedish Riksbank is currently led by Erik Thedéen, widely regarded as an interest rate hawk. He has maintained a relatively high policy rate despite weak growth and rising unemployment.

This stands in contrast to his predecessor Stefan Ingves, who introduced negative interest rates during a long period of persistently low inflation.

A popular saying goes: “Inflation is taxation without legislation.” It is a critical view of monetary policy — the idea that inflation allows governments to reduce the real value of money without the political cost of raising ordinary taxes.

If you have 100,000 SEK in savings and inflation is 5%, that money only has the purchasing power of about 95,000 SEK after one year. You haven’t lost any kronor on paper, but you have become poorer in reality.

The winners from inflation tend to be:

• The government (especially with large debts)
• People with big loans
• Banks and financial institutions that can protect themselves

The losers are:

• Savers
• Pensioners with fixed incomes
• Employees whose wages don’t keep up with inflation

Both Ingves and Thedéen have struggled to consistently hit the 2% inflation target. One mostly undershot it, the other first overshot it before bringing it down. The fact that two governors with very different approaches both failed to hit the target strengthens my belief that the traditional interest rate tool is losing its effectiveness in today’s economy.

We may need new tools for a new economic reality.

One possible idea could be a Swedish digital krona with built-in value preservation. A portion of the money held in this digital currency could automatically be invested in a broad, low-cost index of Swedish productive assets — such as infrastructure, housing, and technology companies. This would give ordinary citizens a simple, automatic protection against inflation, while still keeping the money liquid and accessible.

Perhaps it’s time to think beyond just raising or lowering the interest rate.

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Inflation continues to fall in Sweden

Sweden's central bank AKA the Riksbank continues to miss its 2% inflation target. According to Statictis of Sweden's latest preliminary CPIF figures, inflation for December 2024 fell to 1.5% compared to 1.8% for November 2024 and was not in line with both the Riksbank and market expectations. I maintain my previous view that the Riksbank must find new approaches in addition to the interest rate weapon to keep inflation on track.

The fact that inflation was lower than estimated is mainly due to energy prices falling sharply after the estimate was made, reports EFN. However, CPIF-XE landed at 2.1% and given that there are no signs that the recession has bottomed out and is about to turn around, suspicions of a further reduction in the Swedish policy rate are reinforced at the next monetary policy announcement on January 29, 2025.

The question of where the neutral interest rate, the one that has neither a cooling nor a warming effect on the economy, will be located remains to be seen. The fact that the effects of a interest cut come with a certain delay makes it more difficult, of course. All we can hope for is that the Riksbank does not hold on too tightly to its prestige and pushes Sweden into deflation instead.

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Always this double standard

If Argentina's current president, Javier Milei, who took office in December 2023 promising to cut public spending to bring down prices and close a large deficit, had been a leftist, Legacy Media would have praised him every day for his impressive work on Argentina's inflation. Argentina has struggled to bring down what has been the highest inflation rate in the world, peaking at nearly 300% per year.

Although President Javier Milei can boast of having stabilized Argentina's economy, it is always mentioned that this achievement has come at a high price for large sections of society. Even a recognition from the International Monetary Fund (IMF) that he has achieved macroeconomic stability in a short time does not give President Milei favorable media coverage. The IMF also predicts that, unless something dramatic happens, Argentina's economy could grow by 5% next year.

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They have completely different expectations – it's like apples and oranges

The inflation rate continues to fall in Sweden. According to Statistics Sweden (SCB) the CPI for November 2024 was 1.6% compared to November 2023 and the CPIF for the same period is 1.8%, which means that Sweden's central bank AKA the Riksbank once again misses its inflation target of 2%.

Exactly one week after the announcement by Statistics Sweden, the Riksbank announced that it would lower Sweden's policy rate by 25 basis points to 2.5%, which was in line with expectations according to the Swedish newspaper Aftonbladet. According to the Riksbank's press release, the interest rate is being lowered quote "to provide further support to the economy and help stabilize inflation at the target" unquote.

At the same time, the Riksbank points out that the inflation and economic situation remains uncertain due to geopolitical concerns, uncertainties around trade policy and government crises around Europe, which clarifies their strategy of a more restrained strategy regarding future cuts in the policy rate. Unlike the market, which had hoped for hints of more and faster interest rate cuts in early 2025.

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Awaiting the established data

In a couple of hours, Statistics Sweden (SCB) will publish the Swedish inflation rate for November. On 5 December 2024, Statistics Sweden reported that according to preliminary statistics, CPI inflation for November 2024 was unchanged at 1.6% from the previous month. For CPIF-XE (CPIF excluding energy), the preliminary inflation rate in November was 2.4%, which can be compared with 2.1% in October. Which it's highest level in six months after the Swedish central bank AKA Riksbanken decided to increase the pace of interest-rate cuts to support the ailing economy, writes Bloomberg's.

Whether the established figures deviate from the preliminary ones remains to be seen. The probability that Riksbanken will lower the policy rate on the 19th of December 2024 has decreased significantly.

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Few surprises

The various monetary policy decisions and news poured in yesterday. First up was The Central Bureau of Statistics (SCB) which published its "fast CPI" for the second time. SCB states that inflation rose faster than expected. CPIF for October rose to 1.5% compared to 1.1% in September. An increase to 1.3% was expected according to Trading Economics. The CPI also rose more than expected, landing at 2.1%. Inflation unchanged at 2.0% was expected. The outcome means that inflation is below Riksbanken's inflation target of 2% for the fifth month in a row.

Secondary out was the Swedish central bank AKA Riksbanken which lowered the Swedish policy rate by 50 points, which was completely in line with expectations. This was the biggest change in more than 10 years. Erik Thedéen, governor of Riksbanken, who always warns of uncertain times, specified this time that the various tariffs that the newly elected US president promised to introduce on products manufactured outside America during his election campaign could lead to increased inflation.

However, the problem that arises when you have shouted "Wolf!" at every previous press conference and used every superlative in the dictionary is that it becomes harder to get your message across when it really matters.

Finally, it was time for the American equivalent of the Swedish central bank, the Federal Reserve, and its chairman Jerome Powell to also fulfill the set expectations and lower the US policy rate by 25 points. In addition to Riksbanken and FED, the Bank of England also lowered its policy rate by 25 points yesterday, from 4.75% to 5%.

Countries all over the world have been struggling with rising inflation and more countries aside from the US and Sweden are starting to see results. That the world would have to fight against unusually high inflation after the pandemic was already clear in 2020. In addition to the fight against inflation, many countries, including Sweden, are still suffering from shortages of certain products as a result of the pandemic when China completely shut down their country. I really hope that all the companies that said they intend to move their operations either home or to other countries fulfill on their promises.

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Exciting times await

Next week will be eventful in more ways than one. The outcome of the US presidential election will have a major impact on the Swedish krona's exchange rate, even if the market has already started to "price in" one of the candidates, reports the Swedish online newspaper Dagens PS Media AB.

Provided that a winner is decided on Tuesday or possibly early Wednesday morning Swedish time (GMT+2), Sweden will have one day's rest before the next important decision is published, namely the Swedish inflation figures for October and the Swedish centralbank AKA Riksbanken's decision on the policy rate.

The Central Bureau of Statistics (SCB) published for the first time last month a so-called "fast CPI", which is published about a week before the determined result. This time the "fast CPI" for October is published on 7 November 2024 at 8 a.m., while Riksbanken publishes its monetary policy decision including the policy rate on the same day at 9.30 a.m., i.e. 90 minutes later. I assume that SCB and Riksbanken exchange information with each other, which is not obvious in Sweden where strict secrecy prevails between the various authorities.

For example, the Swedish newspaper Expressen revealed that an internationally wanted gang leader and also one of Sweden's most feared criminals voluntarily contacted the Tax Agency, Sweden's equivalent to the IRS, and announced his whereabouts and received help with important documents. The newspaper's review also shows how the authority has long ignored several alarms about the notorious gang leader.

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Sweden's central bank will most likely disappoint

The Swedish inflation rate according to CPIF (Consumer Price Index with fixed interest rate) was 1.1% in September, which is a decrease from August when it was 1.2%. The information is in line with SBC's preliminary inflation figures that came a week ago. According to price statistician Filip Hellberg at the Central Bureau of Statistics (SCB), the reason why inflation fell in September is that fuel prices have fallen. It is also in line with the average forecast among analysts, according to Bloomberg's compilation.

The fact that CPIF was again lower than Sweden's central bank AKA Riksbanken's target of a CPIF inflation of 2.0% increases the pressure on Riksbanken to lower the policy rate by 50 basis points on November 7, 2024.

Central Bank Governor Erik Thedeén confirms that the quote "Inflation has come down and shows signs of stabilizing. Inflation forecasts has stood up quite well over the past six months." unquote. At the same time, Erik Thedeén repeats that right now there is a lot of focus on CPIF where energy prices are excluded as they move a lot and are assumed to be shaky going forward. Energy prices have fallen by almost 30% in the past year and CPIF are very sensitive to energy prices, continues Erik Thedeén.

Erik Thedeén also emphasizes that there is no mechanical formula for Riksbanken to use when deciding on changes in the policy rate, it is an overall assessment. The Governor of Riksbanken concludes by saying that the forecasts for the policy rate, the so-called interest rate path, are not a promise. Quote “There is still considerable uncertainty. Among other things, geopolitical developments can affect inflation and make further cuts unreasonable." unquote.

Personally, I think that Erik Thedeén and his colleagues have already decided that they will not lower the Swedish policy rate by 50 points and that the warning about a geopolitical development and the exchange rate of the krona is only a way of trying to excuse themselves.

You can't be loved by everyone

Today, US inflation data was announced showing price increases of 2.4% year-on-year, slightly above market expectations of 2.3%. At the same time, it marks a significant decline from the June 2022 peak of 9.1%.

Like Swedish central bank governor Erik Thedeén, Federal Reserve chief Jerome Powell is also questioned. One of his critics is Paul Donovan, chief economist at UBS Global Wealth Management. Mr. Donovan criticizes Jerome Powell in an interview with EFN Ekonomikanalen which is a Swedish media company.

In the interview with EFN, Donovan points out that US CPI statistics contain many disturbances and deviations and Powell places undue importance on the CPI. In addition to his own criticism of Powell, Donovan also claims that several other members of the central bank's executive board disagree with Powell. In support of this claim, Donovan points to yesterday's Fed minutes which show that there is an unusually large public opposition to Jerome Powell.

The internal opposition to Powell depends, among other things, on how inflation is to be measured. Many economists at the Fed prefer the PCE deflator instead of the CPI. Personal consumption expenditures (PCE), also known as consumer spending, is a measure of the spending on goods and services by people of the United States.

The CPI includes only out-of-pocket spending made directly by consumers, while the PCE accounts for expenditures made on consumers' behalf. As a result, health insurance expenses made on behalf of employees by their employers or by Medicare and Medicaid are included in the PCE basket but not the CPI. Despite all the criticism, Donovan says quote "no matter how you measure inflation, it's going in the right direction" unquote.

Donovan continues his criticism of Powell quote “I'm not a big fan of Jerome Powell. I don't think he does a good job." unqoute. Donovan is also not happy with the central bank governor repeating his mantra that the Fed is guided by incoming macroeconomic signals. This means that every single macroeconomic data affects the Fed, even though such statistics are irregular and fluctuating in nature. US labor market statistics, which came in surprisingly strong on Friday, are a clear example of the fickle nature of data.

Paul Donovan pursues his criticism quote "The recent 50 point decline was probably a mistake", unquote. Donovan predicts the Fed will make 25-point rate cuts at upcoming meetings.

It's time for the Swedish central bank to let go of the ice rink wall

Today, the Central Bureau of Statistics (SCB) reported for the first time a new indicator for inflation, called "fast CPI". From today, the indicator will be reported one week before the regular inflation report, which this time will be reported next Tuesday.

"Fast CPI" also includes the measure CPIF, where the figures are not affected by changes in interest rates for mortgages, and CPIF-XE, where energy prices are also excluded. "Fast CPI" is only an indicator of the main measures. The more detailed product measurements for food, for example, are not reported today because SCB believes that those figures would be too uncertain.

The preliminary inflation rate according to CPIF fell from 1.2%  in August to 1.1% in September. This means that Sweden is approaching deflation. Deflation is considered an even more harmful phenomenon than inflation. The general price and wage level falls at the same time as the value of money rises. In deflation, debts must be repaid with money that is worth more than when the loans were taken, and therefore deflation has often led to debt crises and more bankruptcies.

The Swedish central bank must start to ACT, and not as usual react.

The interest rate increases have had their effect

The European Central Bank (ECB) today cut its policy rate by 25 basis points to 3.5%, which was in line with market expectations. The reduction is justified by the ECB as another step towards a reduced tightening of monetary policy.

The ECB chose to leave the forecast for inflation unchanged, but for the so-called core inflation the figures were raised slightly for this year and next year. A stronger upward price pressure than expected in the service sector is the reason, according to the ECB. ECB economists also cut the eurozone GDP forecast to 0.8% growth this year, down from 0.9%. The Swedish stock market and the exchange rate of the Swedish krona against the euro are basically unchanged after the announcement.

However, the most important interest rate announcement for the world economy will be the one that the US central bank, the Federal Reserve (FED), will deliver on September 18. There, too, a reduction of 25 points is expected.

However, a series of unexpectedly weak economic reports in the US have started speculation about a so-called double cut of 50 interest points. Friday's statement by Fed member Christopher Waller quote "Patience is no longer what is required after the latest round of statistics, what is required is action" unquote fueling speculation. The statement was made after a report showed significantly fewer new jobs than expected in the US in both July and August.

If this continues, Sweden will soon experience deflation

Today's report from The Central Bureau of Statistics (SCB) shows that inflation continues to fall in Sweden. The inflation rate, i.e. the change in the CPI from the same month in the previous year, was 1.9% in August 2024. That's down from July when it was 2.6%, which is more than expected. The monthly change from July to August was -0.6%, according to the CPI.

Transport prices, for example international air travel and car rental, also fell, which can be explained by the reduction in fuel prices. In addition to fuel prices, the prices of food, non-alcoholic beverages and package tours have also fallen. The price reductions were countered, among other things, by higher clothing prices.

The rate of inflation according to CPIF, which, unlike the CPI, is not affected by changes in interest rates on household mortgages, was 1.2% in August. It is also down from July, when it was 1.7%. Most analysts believe that the Swedish central bank AKA Riksbanken will lower the policy rate at the next publication of the monetary policy decision including the policy rate on September 25.

Today's inflation report will most likely increase the criticism of the Swedish central bank and its head Erik Thedéen for not having lowered the policy rate earlier. It currently stands at 3.5%. Many analysts claim that the reason why inflation continues to be pushed down below both the market's and Riksbanken's expectations is because Riksbanken has been sitting on the fence. The only thing driving inflation right now is increased costs as a result of interest rate hikes, which is a warning sign. At the moment, public finances are on their knees with an economy that is not developing, high unemployment and companies hanging by a thread.

The numbers are in

Inflation in America fell to 2.5 percent in August, as claimed by the US Department of Labor's Bureau of Labor Statistics (BLS). According to Bloomberg's compilation, the outcome was completely in line with the average forecast and can be compared with 2.9 percent in July.

At an annual rate, core inflation landed as expected at 3.2 percent, which is unchanged compared to the previous month. In core inflation, food and energy prices are excluded.

Both Nasdaq and Dow Jones had risen by closing. Initially, the US dollar strengthened and then fell back to the opening rate.

Falling inflation in the eurozone

Last Friday came the preliminary data for the eurozone, inflation for August falls back. This means that the pressure on the European Central Bank and, by extension, also the Swedish central bank to lower their policy rates increases.

The preliminary data shows that inflation in the eurozone fell to 2.2 percent in August, compared to 2.6 percent for July. According to Bloomberg, the decline is in line with the average forecast among analysts. If this result were to be confirmed, it would be the lowest level in the eurozone in three years. Both France and Germany, which are major European countries, have reported weaker inflation figures for August.

The main reason for the falling inflation is the lower energy prices. CPIF-XE is not as happy reading, with inflation only falling to 2.8 percent compared to 2.9 percent in July. Unlike energy prices, services prices in the eurozone are heading in the wrong direction, rising faster in August than in July, according to monthly figures.

It seems to be going according to plan

Swedish inflation rose compared to the previous month from 1.3% to 1.7% and is still below Sweden's central bank AKA Riksbanken's inflation target of 2% per year measured by CPIF. It was the second month in a row that inflation ended up below Riksbanken's inflation target. This information writes in stone that Riksbanken will make the second reduction of this year's policy rate next week.

One reaction to the fact that inflation for July was lower than the target is that more actors are now requesting a double reduction, i.e 50 points, from Riksbanken on 20 August. One reason for the demand for a double reduction is that Sweden's unemployment and bankruptcies are steadily increasing due to the austerity that occurred because of Riksbanken's previous policy rate increases. Even if Riksbanken's measures take place in real time, it takes time before they are noticed by society and Sweden is drawn deeper into its current recession.

Despite this, I do not think that Riksbanken will let off the brakes, but will continue with reductions of 25 points at a time. At the presentation of the rate of inflation for last month, a Swedish member of parliament thought that as inflation falls, prices would also fall, but it doesn't work that way. The fact that inflation falls and not prices is due to comparing this year's July prices with the prices for July 2023.

America's inflation rate for July was also reported yesterday. Inflation rate falls to 2.9% in July, adding to signs that rising prices have slowed. Consumer price growth in July slowed to its lowest level since the pandemic, a sign that the rising inflation that has gripped the US economy is finally ebbing.

Dow Jones had already priced in the numbers and the market's reaction was moderate.

Don't do like us

Today at 8 a.m. (GMT+2), The Central Bureau of Statistics (SCB) will present the Swedish inflation rates for July 2024. The closer the announcement gets, the more experts agree with the expectation that inflation will be significant lower than Riksbanken's target of 2% per year as measured by CPIF.

Experts who only a week ago indicated food prices as a product group that usually rises in price during the summer and thus can be used as a lever for inflation did not rise in price as usual and therefore does not contribute to stabilizing the rate of inflation. If this is true, inflation is likely to fall further. I maintain my expectation of 1.7 percent.

However, I agree with the voice of the critics that Riksbanken, in its eagerness to manage inflation, has pushed too hard with increases in the policy rate. Just like his predecessor Stefan Ingves, the current central bank governor Erik Thedéen seems to lack a vigorous, zestful touch. Stefan Ingves applied a negative policy rate during a boom for many years, while Erik Thedéen, with his focus only on the inflation target, has brought Sweden deeper than necessary into a recession. Both were/are completely dull of hearing to the outside world.

Unlike Sweden, America seems to be seeing the end of its recession. Bank of America Corporation Common Stock (BAC) CEO Brian Moynihan tells CBS they no longer predict a long-term downturn for the economy. (BAC)'s latest forecast indicates that the Federal Reserve's (FED) efforts to bring down inflation while keeping the US economy stable appear to be working. CEO Brian Moynihan says quote "We've won the war on inflation, it's come down. It's not where people want it yet, but we have to be careful that we don't try to be so perfect that we actually end up in a recession." unquote.

Hopefully, the FED will listen to its surroundings, unlike its Swedish colleague Riksbanken, which has run its own race. With devastating outcome.

Empty barrels scrape the most

On 14 August 2024, The Central Bureau of Statistics (SCB) will publish Sweden's inflation rates for July. Chief strategists and economists from the major commercial banks in Sweden expect CPIF, the measure used by Sweden's central bank AKA Riksbanken where interest rate effects are excluded, to have increased compared to June 2024, albeit marginally. Experts' expectations are in the range of 1.5%-1.6% compared to the inflation rate of 1.3% for June.

An explanation why CPIF may rise compared to June may be due to fluctuations in energy prices. Electricity prices fell in July this year, but significantly less than a year ago. There are also indications that food prices have risen less than expected. These factors combined may cause inflation to end up lower than expected, personally I think CPIF will be 1.7%.

However, I believe that the CPI, which includes interest costs, may have declined compared to the June 2024 inflation rate of 2.6%. I base this on Riksbanken's lowering of the policy rate in May this year in connection with lower fuel prices now in July compared to July last year.

At the last monetary policy meeting, Riksbanken made vague promises that they may make another 3 reductions in the policy rate in 2024. But before it's written in stone, it's just empty promises with no meaning. None of the major commercial banks believe in a double reduction, i.e. 50 basis points at the upcoming monetary policy meeting on August 20, 2024.

If inflation falls below Riksbanken's inflation target of 2% per year measured by CPIF, the pressure from outside on Riksbanken for a double reduction will be enormous.

Lower than expected

The Central Bureau of Statistics (SCB), which is the organization responsible for reporting Sweden's inflation rates, published the figures for June today. According to Bloomberg, the economists' expectations for CPIF for June 2024 were 1.6%, instead it became 1.3%. Which is 1% lower compared to 2.3%, which was the inflation rates for May 2024.

That the outcome was as low as 1.3% will put pressure on Sweden's Central Bank AKA Riksbanken to lower the policy rate in August, whose target for CPIF is 2%. I don't want to believe that Riksbanken, which is supposed to be the best Sweden has when it comes to the economy, did not foresee this massive decline.

I stick to my guess that Riksbanken took the cowardly route and refrained from lowering the policy rate at the last monetary policy meeting on 27 June 2024 to avoid risking the Swedish krona losing value against the euro in the middle of the summer holidays.

This bad news cannot go on forever

CPIF for May was 2.3%, which is slightly higher than the 2.1-2% that most economists had predicted. This cemented the market's expectations that a future cut in the policy rate will only take place at the monetary policy meeting on 19 August 2024 and not on 27 June 2024.

I believe that Riksbanken will be forced to lower the policy rate by at least 50 percentage points before the turn of the year 2024/25 to get Sweden's economy going again. Since March 2023, the number of bankruptcies per month has continued to be higher than the corresponding month the year before, which is 15 months in a row.

The trend is deeply worrying and indicates a deep recession.

Damned if you do, damned if you don't

Sweden's inflation figure for March 2024 is lower than many, including Sweden's central bank, expected. The expected 2.7% became 2.2% according to CPIF.

Sweden's central bank AKA Riksbanken has previously announced that they intend to lower the policy rate either in May or June. There is, however, one factor that causes Riksbanken a great deal of concern, the exchange rate of the Swedish krona.

When the inflation figure was published, the Swedish krona further lost value against the US dollar. When the inflation outcome is this low, you might have to accept a slightly weaker Swedish krona.

If we have high inflation, it can be difficult with a weak krona, because then import prices will be higher. If we have low inflation, it is difficult with a strong krona, because then inflation can be too low.