Sweden's Housing Shock Hits Krona, Leaving Riksbank Few Choices

(Bloomberg) -- Can a central bank steer the housing market?

Not so long ago, Sweden’s Riksbank decided: no. Now, there’s a risk that decision may backfire as the biggest property market in Scandinavia risks sinking into a correction.

The evidence of price declines was so worrying on Tuesday that it contributed to a 1.5 percent slump in the krona against the euro. A weak currency puts the Riksbank’s inflation target at risk. So should it be looking at the housing market more closely?

Developments in Sweden’s housing market “could spark some doubts at the Riksbank as it may affect the overall economic outlook and inflation,” Nordea analyst Andreas Wallstrom said in a note.

Read more on housing market here

Sweden's Housing Shock Hits Krona, Leaving Riksbank Few Choices

Sweden’s Riksbank has thrown all its energy into fighting deflation and, earlier this year, finally regained credibility on its inflation mandate. Policy makers now say they may be ready to start raising rates in the middle of next year. At the same time, the Riksbank may extend a bond purchase program due to end this year.

But in the minutes of the Riksbank’s latest rate meeting, Deputy Governor Cecilia Skingsley suggested that monetary policy, “under certain circumstances, can be used to combat the effects of major household debt.” She also said the housing market “must be carefully monitored,” given the latest developments.

Nordea’s Wallstrom says the central bank will probably need to see a “sharp drop” in house prices with a direct impact on the real economy before it will look into adding significant stimulus. But the bank might decide to signal rates will stay where they are for even longer.

“A smaller step for the Riksbank is, however, to pull down the rate path further,” he said. “This could happen already in December.”

Meanwhile, even the bank’s inflation targeting efforts are yielding mixed results. The latest data show that Swedish inflation was below the Riksbank’s target in October.

Read more on inflation report here

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