Good to lower the policy rate, but much too late

[English translation of “Bra att sänka, men alldeles för sent“, blog post on SvD Börsforum.]

It is good that the Riksbank at last lowered the policy rate to 0.25 percent. But it is much too late. For several years, Sweden has had too high a policy rate, too low inflation, and too high unemployment. But better late than never. 

As Finansinspektionen (the Swedish FSA) has pointed out, the low inflation has actually increased the households’ real debt burden, that is, debt in relation to the general price level. This has, if anything, increased any risks associated household debt, not reduced it. The Riksbank’s policy of leaning against the wind has thus actually been counterproductive with respect to household debt, in addition to leading to inflation below the target and unemployment above a long-run sustainable rate.

The big mistake in Swedish monetary policy was to start increasing the policy rate in the summer of 2010 instead of leaving it at 0.25 percent. If the policy rate had been left at 0.25 percent until now, inflation would now have been much closer to the target, unemployment would have been substantially lower, and household real debt most likely lower.