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Sweden: Deflation-Fighting Riksbank Faces Housing Market Dilemma

Sweden’s financial authorities are battling deflation (inflation is near zero).

Back in February, the Riksbank lowered its base interest rate into unprecedented negative territory and announced it would buy up government bonds in an effort to fend off deflation. Sweden’s central bank dropped its zero interest rate to -0.1 percent.

Even so, the nation’s housing market is in a bubble – prices are on par with those in London, England.

Now, the Riksbank faces a dilemma. Read this excerpt from a November 1 Reuters article:

The Riksbank's decision this week to keep rates lower for longer just extends a bonanza of cheap money that has fueled the real estate prices and borrowing. But the central bank is caught in a dilemma.

Leaving rates so low only encourages home buyers. But raising them enough to tamp down the housing frenzy would also slow an inflation rate that is already flirting with zero and has dipped into outright deflation.

The concern is that Sweden might end up with a local version of the 2008 financial crisis. Homeowners saddled with enormous mortgages might see the value of the homes plummet. They would cut back on spending, try to save more - and hobble the economy.

You can read the entire article by following the link below:
http://www.reuters.com/article/2015/11/01/us-sweden-housing-idUSKCN0SQ1L320151101

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