Riksbank under fire amid pension fund fears

A former Riksbank official has criticized the bank’s slow reaction to the current financial crisis as concerns mount about the vulnerability of Sweden’s pension funds to a continued drop in the stock market.

So far, Sweden’s large pension companies – public funds charged with managing the pension savings of Sweden’s taxpayers – have weathered the recent wave of falling stock prices.

Sweden’s Financial Supervisory Authority (Finansinspektionen – FI), which tracks the funds’ performance, believes the pension companies continue to fulfill their solvency requirements in accordance with Swedish law.

However, the agency notes that lower stock prices and falling interest rates have had a negative impact on the companies’ capitalization.

Despite the fact that the pension companies all had substantial buffers at the start of the current wave of economic turmoil, the persistence of uncertainty in the markets and dropping share prices has made the companies more vulnerable, according to FI.

“A continued sharp drop in stock prices and interest rates could alter the current assessment of the companies’ resistance [to continued turbulence],” said the agency in a statement, referring to the pension companies’ limited capacity to lower their risk profiles by selling off risky assets in the short term.

Meanwhile, Kerstin Hessius, current head of the 3rd AP Fund pension company and a former vice-governor with the Riksbank, slammed the bank for taking its time in reacting to the current crisis.

In an article published in the Svenska Dagbladet (SvD) newspaper, Hessius said it was time for her former colleagues to wake up and take action.

“Hello, my dear former colleagues, have you gotten stuck in your models and the old national accounts built on historical information?” she writes.

Hessius thinks Wednesday’s 0.5 percent repo rate cut, which brought Sweden’s benchmark interest rate down to 4.25 percent, was too little too late “and wasn’t even initiated by the Riksbank”.

Instead, she calls upon the Riksbank to drastically cut interest rates down to 2.25 percent, and to propose to the government that it set up a public guarantee for the Swedish banking system.

She also believes the recently doubled savings guarantee of 500,000 kronor ($71,000) is insufficient.

Moreover, Hessius urges the Riksbank to take a stronger leadership role to head off problems before they occur.

“The reaction has been reactive, they alleviate problems after they’ve materialized…in this situation someone must dare to lead, be proactive, and not lay blame on the crisis being global,” she writes.

“It’s the Riksbank which has the responsibility and the knowledge. Take responsibility and act swiftly! Other countries in Europe will follow.”


Sweden’s Riksbank raises rates above zero for first time since 2014

Sweden's central bank has increased its key interest rate to 0.25 percent, marking the first time the rate has been above zero for nearly eight years.

Sweden's Riksbank raises rates above zero for first time since 2014

In a press release announcing the move, the bank said that it needed to take action to bring down the current high rate of inflation, which it predicts will average 5.5 percent in 2022, before sinking to 3.3 percent in 2023.

“Inflation has risen to the highest level since the 1990s and is going to stay high for a while. To prevent high inflation taking hold in price and wage developments, the directors have decided to raise interest rates from zero to 0.25 percent,” it said. 

The Riksbank, which is tasked by the government to keep inflation at around two percent, has been caught off-guard by the speed and duration of price rises.

Just a few months ago, in February, it said it expected inflation to be temporary, predicting there was no need to increase rates until 2024.

The last time the key inflation rate was above zero was in the autumn of 2014. 

In the press release, the bank warned that the rate would continue to increase further in the coming years. 

“The prognosis is that the interest rate will be increased in two to three further steps this year, and that it will reach a little under two percent at the end of the three-year prognosis period,” it said. 

According to the bank’s new future scenarios, its key interest rate will reach about 1.18 percent in a year, and 1.57 percent within two years. 

In a further tightening of Sweden’s monetary policy, the bank has also decided to reduce its bond purchases. 

“With this monetary policy we expect inflation rates to decline next year and from 2024 to be close to two percent,” the bank wrote. 

Annika Winsth, the chief economist of Nordea, one of Sweden’s largest banks, said the rate hike was “sensible”. 

“When you look at how inflation is right now and that the Riksbank needs to cool down the economy, it’s good that they’re taking action – the earlier the better. The risk if you wait is that you need to righten even more.” 

She said people in Sweden should be prepared for rates to rise even further. 

“You shouldn’t rule it out in the coming year. Then you’ll have a once percentage point increase which will go straight into fluctuating mortgage rates.”