Divisions in the Central-Bank Ranks

Category: Global Market


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Divisions in the Central-Bank Ranks

 

By RICHARD BARLEY

Central bankers in the world's biggest economies are understandably sitting on their hands as the sustainability of the recovery remains in doubt. That is giving their colleagues in stronger economies a dilemma as they seek to raise rates.
Take Sweden, where the Riksbank Thursday raised rates a quarter percentage point, to 0.75%. The economy is booming. In April, the Riksbank forecast gross-domestic-product growth of 2.2% for the year; it now expects 4.1%. Exports, which account for about half of GDP, are surging. Swedish consumers are at their most confident in almost 10 years, and household spending and borrowing are rising. Fiscal policy is expansionary and can remain so, given Sweden's low debt-to-GDP ratio.
So even with subdued inflation, it is no surprise the Riksbank wants to take its foot off the accelerator a little. Rates are expected to reach 1%-1.25% by year-end.
Even so, the Riksbank is understandably concerned, like the markets, about the strength of the U.S. and euro-zone recoveries and the effect on the Swedish economy. Sweden's reliance on exports makes it sensitive to global growth. Rate increases ultimately will push up the Swedish krona and risk damping exports and the economy. This may be even more the case when rates in the major economies are so close to zero and expected to stay there for many months.
Under those circumstances, even a relatively small gap between Swedish rates and rates elsewhere may be a larger magnet for capital flows than the same gap when rates broadly are higher.
Many doubt the Riksbank will be able to normalize rates longer term along the lines it set out Thursday, reaching about 2.5% by the end of 2011 and 3.8% by the third quarter of 2013. Deputy Gov. Lars Svensson has consistently voted against rate increases, including Thursday's, and Deputy Gov. Karolina Ekholm is calling for shallower rate increases that end at about one percentage point lower than the current path.
As long as the economic laggards remain stuck in low gear, Sweden's policy debate could well become a familiar sight in the monetary-policy leaders, like Norway, Australia and Canada.
Write to Richard Barley at richard.barley@dowjones.com

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