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Swedish Forecasting Debacle Feeds Doubts Over Negative Rates

(Bloomberg) -- Sweden’s government has everyone wondering whether it just sent a thinly veiled message to the central bank.

On Thursday, the finance ministry published a set of forecasts that included a return to negative interest rates. The ministry says not to read too much into it. The market disagrees. A Swedish administration caught fiddling in monetary policy risks breaching the country’s constitution.

Thursday’s government forecast, which points to subzero rates in both 2021 and 2022, comes less than a month after the Riksbank made history by ending half a decade of the policy. The Riksbank says the economy is strong enough to manage without, but the government appears to think otherwise.

Stefan Mellin, a senior analyst at Danske Bank in Stockholm, called the government’s rate forecast “a bit provocative.”

“It’s almost like the government is sending a small signal to the Riksbank that it could lower rates again,” said Knut Hallberg, an economist at Swedbank in Stockholm.

Carl Hammer, head of macro and FICC research at SEB, also interpreted the government’s statement as an indication rates will go back below zero. Sweden faces a “reduced repo rate again, according to [Finance Minister Magdalena] Andersson,” he tweeted.

Robert Bergqvist, a former Riksbank economists who now oversees the macro research department at SEB, suggested the government was giving itself some leeway to blame monetary policy if the economy does worse than expected. “This doesn’t feel good at all,” he tweeted.

The debate matters because in Sweden, as in many other countries, governments are supposed to steer well clear of monetary policy. Failing to do so undermines the credibility of central banks as independent entities without political agendas. It’s a theory that has recently been put to the test in a very public way in the U.S., where President Donald Trump has made no secret of his desire for a laxer monetary policy.

Magdalena Andersson, Sweden’s finance minister, said she didn’t want to comment on the rate forecast, because it might be “perceived as though I were giving the Riksbank instructions. I can’t say anything about that. Otherwise I’ll end up in front of the Committee on the Constitution.”

Meanwhile, her ministry’s predictions for the economy and inflation are weaker than the Riksbank’s. And as Johanna Jeansson of Bloomberg Economics puts it, “The forecasts imply that Sweden needs a boost from somewhere. If not from fiscal, then from monetary policy.”

The fallout of a global economic slowdown is “becoming increasingly clear” in Sweden, Andersson’s ministry said on Thursday. It said the forecasts don’t include the effect of reforms it’s hoping to push through to support the economy. Sweden now sees GDP growing just 1.1% this year, compared with an August forecast for 1.4%. It cut its 2021 growth estimate to 1.6% from 1.8%.

Hammer at SEB said the fundamental question centers on the dynamic between government and central bank policy.

“For a long time we’ve had the wrong policy mix: fiscal policy has been too tight and monetary policy has been too lax,” he said. It now seems that “there’s no change in sight.”

(Adds Bloomber Economics comment)

To contact the reporters on this story: Love Liman in Stockholm at jliman1@bloomberg.net;Rafaela Lindeberg in Stockholm at rlindeberg@bloomberg.net;Veronica Ek in Stockholm at vek@bloomberg.net

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net

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