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Moody's: Negative interest rates in Switzerland, Denmark, Sweden are having unintended consequences, with Sweden most at risk of asset bubble

Global Credit Research - 16 Mar 2016

London, 16 March 2016 -- The central banks of Switzerland, Denmark and Sweden (all rated Aaa stable) have been among the first to push policy rates into negative territory. A year into this novel experience, Moody's Investors Service concludes that, from among the three countries, Sweden is most at risk of an -- ultimately unsustainable -- asset bubble.

Moody's report, entitled "Governments of Switzerland, Denmark & Sweden: Negative interest rates have unintended consequences, with Sweden most at risk of asset bubble," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action.

The three countries' central banks have lowered their key policy interest rates to the current -0.75% in Switzerland, -0.65% in Denmark and -0.5% in Sweden, albeit for different reasons. The Swiss and Danish central banks were aiming to reverse the intense appreciation pressure on their currencies as a result of the ECB's introduction of its quantitative easing program. In Sweden, the central bank is focused on lifting persistently low inflation, in the context of the ongoing strong economic expansion.

"In Moody's view, the Danish and Swiss central banks have achieved their main objective given that the appreciation pressure on their currencies has eased or, in the case of Denmark, even disappeared completely. But this is not the case for Sweden, where the Riksbank has not been successful in engineering higher inflation, while Sweden's GDP growth continues to be among the strongest in the advanced economies," says Kathrin Muehlbronner, a Senior Vice President at Moody's.

"At the same time, the unintended consequences of the ultra-loose monetary policy are becoming increasingly apparent -- in the form of rapidly rising house prices and persistently strong growth in mortgage credit", adds Ms Muehlbronner. In Moody's view, these trends will likely continue as interest rates will remain low, raising the risk of a house price bubble, with potentially adverse effects on financial stability as and when house prices reverse trends. In all three countries, households are highly leveraged, and while they also have high levels of financial assets, returns on these assets will be under increasing pressure if the negative interest and yield environment persists.

Moody's is not overly concerned about Switzerland and Denmark as the rating agency considers these trends as "unavoidable" side effects of an otherwise successful policy. Mortgage lending also shows first signs of slowing in both countries, and Switzerland in particular has deployed several macro-prudential tools to reduce risks to financial stability.

However, Moody's believes the situation is different in Sweden. It believes that the Riksbank will find it difficult to achieve its objective of significantly pushing up consumer price inflation in a deflationary global environment, while the sustained and strong growth in mortgage lending and house prices risks leading to an (ultimately unsustainable) asset bubble.

The Swedish authorities have imposed counter-cyclical capital buffers on their banks, and the country's banking regulator has announced additional measures with effect from mid-2016 onwards. However, it remains to be seen how effective these measures will be in achieving a material slowdown in credit growth and house prices, while interest will likely remain at negative (or very low) levels. In general, Moody's believes that macro-prudential tools are most effective if they complement rather than oppose the direction of monetary policy.

Subscribers can access the report at:

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1019623

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Kathrin Muehlbronner
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: Negative interest rates in Switzerland, Denmark, Sweden are having unintended consequences, with Sweden most at risk of asset bubble
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