Gabriel Stein on the latest monetary developments in Sweden.
Swedish broad money growth accelerated in the second quarter of 2020. In June, M3 grew by 15.6% from a year earlier, the fastest rate since April 2008. Moreover, and in contrast to the situation in a number of other economies, monthly broad money growth also picked up, reaching 2%. This compares with a long-term average of 0.5% monthly M3 growth. Part of the faster broad money growth is due to continued strong credit growth. However, total credit to the non-bank private sector is only growing at 6%. The excess money growth is due to two other factors, an inflow of foreign money, strengthening the Swedish krona; and public sector borrowing. Inflation remains subdued, with the latest data at 0.7% (compared with a target of 2%). However, broad money growth has now been in the double-digits for four months (and near 10% for the preceding five months). The last time M3 grew consistently at double-digit rates, in the run-up to the Great Recession, inflation eventually reached close to 4.5% (September 2008). In spite of the strong krona, Sweden continues to benefit from the nascent recovery in the rest of the world. Assuming (as with all current forecasts) no second wave of the pandemic, continued healthy broad money and credit growth, coupled with reviving foreign demand, should underpin the Swedish recovery. The stronger krona should help to restrain inflation but the large monetary injection in 2020 should still see the CPI rise above target in 2021.