Royal Bank of Scotland Group says lenders in Sweden have chosen the "worst" moment to tighten lending standards in Scandinavia's biggest economy.

A decision by the Swedish Bankers’ Association last week to force homeowners to amortise all new mortgages worth more than 50 per cent of their properties risks hurting demand in an economy already grappling with disinflation and its associated risks, according to Par Magnusson, RBS’s chief economist in Stockholm.

"I can't envision a worse timing when we have an economy with such low inflation, a depleted monetary policy, a big output gap in the economy," Magnusson said by phone. "Tightening is exactly the opposite of what this economy needs." Inflation has missed the Swedish Riksbank's 2 per cent target for almost three years, prompting Nobel Laureate Paul Krugman in April to warn that Sweden faces a Japan-like deflation trap.

Three months later, the Riksbank cut its main interest rate by 50 basis points to 0.25 percent as policy makers signaled declining consumer prices pose a greater threat than the risk of overheated credit and housing markets.

‘Stupid’ initiative

Governor Stefan Ingves, who is also chairman of the Basel Committee on Banking Supervision, was overruled by his board in his effort to push for a smaller cut. He has repeatedly argued against excessive easing, which he says risks fueling growth in Swedish households' record debt burdens. Of those borrowers with mortgages smaller than 75 per cent of their property's value, only 40 per cent pay down their debt, according to a 2013 report by the Swedish Financial Supervisory Authority.

Policy makers have struggled to find the right mix to address growing household indebtedness without hurting demand. Nykredit Bank A/S says the bankers' association's proposal, which marks a tightening versus the 70 per cent threshold the organisation previously set, will hit consumer demand at a time when monetary policy has little additional ammunition to soften the blow. "It's stupid to launch new tightening measures when the Riksbank more or less has used up its rate weapon," said Henrik Erikson, chief economist at Nykredit in Stockholm. "If it turns out that amortisation requirements have a big effect on private consumption, the Riksbank will find it pretty hard to accommodate that with monetary policy."

Rate cut

He estimates the Riksbank will cut its policy rate to a record low of 0.15 per cent in December. The Riksbank is unlikely to get much support from the new government, Magnusson at RBS said. The new coalition of Social Democrats and the Green Party plans to increase taxes for wage earners and companies to help pay for more welfare spending. "Show me a politician today who understands that it's a good idea to have an expansionary fiscal policy. Such a politician doesn't exist," Magnusson said. "It's a pretty unpleasant cocktail that households are faced with.

Bloomberg