View Full Version : Bubble, bubble, NIRP and trouble

16th March 2016, 15:20

The three countries' central banks have lowered their key policy interest rates to the current -0.75% in Switzerland, -0.65% in Denmark and -0.5% in Sweden, albeit for different reasons. The Swiss and Danish central banks were aiming to reverse the intense appreciation pressure on their currencies as a result of the ECB's introduction of its quantitative easing program. In Sweden, the central bank is focused on lifting persistently low inflation, in the context of the ongoing strong economic expansion.

"At the same time, the unintended consequences of the ultra-loose monetary policy are becoming increasingly apparent -- in the form of rapidly rising house prices and persistently strong growth in mortgage credit", adds Ms Muehlbronner. In Moody's view, these trends will likely continue as interest rates will remain low, raising the risk of a house price bubble, with potentially adverse effects on financial stability as and when house prices reverse trends. In all three countries, households are highly leveraged, and while they also have high levels of financial assets, returns on these assets will be under increasing pressure if the negative interest and yield environment persists.

However, Moody's believes the situation is different in Sweden. It believes that the Riksbank will find it difficult to achieve its objective of significantly pushing up consumer price inflation in a deflationary global environment, while the sustained and strong growth in mortgage lending and house prices risks leading to an (ultimately unsustainable) asset bubble.