By Charles Duxbury And Brian Blackstone
STOCKHOLM--Sweden's central bank surprised markets by cutting a
key interest rate deeper into negative territory, underscoring the
limited monetary-policy options for European countries outside the
dominant eurozone.
The persistent economic weakness in the eurozone--and a massive
stimulus program launched by the European Central Bank earlier this
year--has left the currency bloc's neighbors little alternative but
to follow the ECB's lead. That comes despite worries, from
Scandinavia to Switzerland, that healthy economic growth and low
borrowing rates are leading to unsustainable price increases in
housing and other sectors.
Economic turmoil in Greece is complicating the task of European
central banks outside the eurozone even more by lifting demand for
assets in countries that investors perceive as safe. That, in turn,
is pushing up their national currencies and threatening
exports.
Faced with these diverging prospects, Sweden's central bank, the
Riksbank, cut its main policy rate to a record low of minus 0.35%.
It also extended its bond-buying program by $5.37 billion.
A key reason: the ECB's massive quantitative easing
program--which will pump more than EUR1 trillion ($1.11 trillion)
in freshly minted money into financial markets by September
2016--has sparked a flood of money into the Scandinavian economies
and forced policy makers to effectively match the ECB's stimulus or
risk soaring currency values.
For these small, open economies, "you are influenced in what's
going on with your big neighbor," said Paul De Grauwe, professor at
London School of Economics.
There is another factor at work too: Greece, whose uncertain
future as a euro member has roiled financial markets. For countries
such as Sweden, being outside the eurozone would appear to be a
blessing: It has much less financial exposure than Germany and
others in the euro bloc, and doesn't have to be involved in many of
the high-stakes crisis summits.
But they still face challenges. With Greece in crisis, global
investors are more likely to seek havens, driving up Sweden's krona
and Switzerland's franc. At a news conference, Riksbank Gov. Stefan
Ingves said his country's growth looked set to take off next year
but the crisis in Greece had "substantially increased the
uncertainty" over the prospects for overseas growth.
If the Swedish krona were to strengthen considerably it would
make the Swedish central bank's task of boosting inflation to its
target of 2% all but impossible as imports would become cheaper.
Swedish inflation is currently running at 0.1%.
Meanwhile, both Denmark and Switzerland have cut deposit rates
to record lows of minus 0.75% despite solid economic prospects.
Denmark aims to keep its currency, the krone, pegged to the euro to
provide stability for exporters and keep inflation low.
Switzerland's central bank had set a ceiling on the franc's value
against the euro for more than three years but abandoned it in
January, sending the franc soaring. The Swiss central bank
intervened in currency markets this week after Greece's crisis
escalated.
Yet these measures are for economies that are fundamentally
strong. The unemployment rate was 7.7% in Sweden last month and
6.2% in Denmark, versus 11.1% in the eurozone.
In short: they are exercising a crisis-like monetary policy,
just without the crisis.
But concerns are rising that the monetary policies taken
recently could create problems for the future by fueling
destabilizing asset bubbles, particularly in housing.
Sweden suffered through a burst debt bubble in the early 1990s
and Denmark's housing market crashed about a decade ago. Some
economists say there are fresh signs that these bubbles are forming
again and officials are starting to worry their policies are a root
cause. They hope that regulatory policies can prick any bubbles
before they get dangerously large.
Data released Thursday showed Swedish house prices in Stockholm
rose 15% on the year in the second quarter and builders are
struggling to meet demand for new apartments.
The noise of hammering can be heard at Vällingby Parkstad, a
redevelopment of the old headquarters of the state-owned power
company Vattenfall AB on the western edge of Stockholm. When
Vattenfall moved out in 2012 the cranes and earth movers arrived.
Apartments have been selling fast since they went on sale last
year.
Olga McLeod, a 30-year-old medical researcher, braved rain with
her two children to view an apartment on a recent Sunday. "It is
really tough. Prices go up so quickly and you need to go through
the bidding and it is stressful. You expect one price and then it
goes up 500,000 Swedish kronor [$60,000] and you are out of your
range," she said.
A similar pattern can be seen in Denmark.
On a recent day in Copenhagen, Soren Felden Nielsen, the chief
commercial officer for a Danish property developer, checked
progress at the Carlsberg City project, a residential and
commercial area that his company is building near the city
center.
When Carlsberg, the world's fourth largest brewer, halted
production here in 2006, it left a prime location for
redevelopment. But nothing happened on the 330,000-square-meter
site until 2012, when the economy began to pick up again after a
sharp slowdown during the financial crisis.
Mr. Felden Nielsen said 32 apartments on a block called
Humlehuset had been put up for sale for between 2.095 million
Danish kroner ($312,007) and 2.895 million Danish kroner
($431,150).
All the apartments in Humlehuset were reserved within 24 hours
of being released to the market, he said.
He said he was sanguine about the risks, saying the sharp price
rises in Copenhagen are underpinned by a lack of housing stock and
migration into the capital. He saw potential for further price
rises, albeit at a slowing pace, even if interest rates move
higher.
At the Riksbank, Mr. Ingves has struck a bleaker tone. "If you
look at the history of this country, there are usually 30 years
between crises," he said in a recent speech. "That is about the
amount of time it takes for people to forget. We have another five
to go."
Write to Charles Duxbury at charles.duxbury@wsj.com and Brian
Blackstone at brian.blackstone@wsj.com