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FINANCIAL CRISIS

Riksbank: crisis ‘clearly affecting’ Sweden

The Riksbank’s top two officials have publicly acknowledged that the global financial crisis has arrived in Sweden as they announced an additional lending facility to help ease up tight credit markets.

Published: 2 October 2008 14:43 CEST

Riksbank: crisis 'clearly affecting' Sweden

“Sweden has so far been spared the worst. But now the financial markets in Sweden are also clearly affected by the uncertainty and lack of confidence, which thus also affects the Swedish banks and other financial agents,” said First Deputy Governor Irma Rosenberg in a speech at Statistics Sweden on Thursday.

Rosenberg’s concern was echoed by Riksbank head Stefan Ingves in a separate statement detailing the Riksbank 60 billion kronor ($8.5 billion) credit facility.

“The international financial turbulence is now clearly affecting the financial markets in Sweden, Swedish banks and other financial market participants,” said Ingves.

While Sweden’s banks remain well-capitalized and have limited loan losses thus far, Ingves warned that problems in long-term credit markets could cause problems for Swedish banks, companies, and households.

“The Riksbank is now taking measures to facilitate the supply of credit. If the situation were to deteriorate, the Riksbank and other government agencies are well-prepared to deal with the problems,” he said.

The new lending facility totaling 60 billion kronor will be made available through an October 6th auction. An additional auction is planned for October 27th.

Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview.

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken.

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.”

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.”

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said.

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.

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