Flodén: Measures to mitigate the risks from high and increasing household debt
The amortisation proposal is a step in the right direction. But to slow down the build-up of debt one must continue taking suitably-large steps. This comment is made by Deputy Governor Martin Flodén at a conference organised by BNP Paribas on Thursday.
Mr Flodén begins by giving his views on the economic situation and monetary policy. Economic prospects have improved, but inflation is still low. Mr Flodén assesses that the low repo rate is sufficient for inflation to rise towards the target. But he also thinks that there is scope to hold the repo rate even lower and to take further measures if necessary.
Mr Flodén also discusses his views on measures to manage the high and increasing household debt. Large debts, combined with variable mortgage rates make households vulnerable to unexpected events. Vulnerability is not necessarily a question of households becoming unable to service their debts, but rather of them reacting to shocks in a way that leads to a fall in consumption, as well as in growth and employment. Mr Flodén says that it is therefore important that measures are introduced that manage the high household debt in a long-term perspective; an adjustment process that needs to be made in suitably-large steps.
Mr Flodén considers that Finansinspektionen's amortisation proposal is well-thought out for now, but that the work on the long-term adjustment process must continue. He therefore argues that extending the fixed interest period for mortgage borrowers would be a good idea. "For an individual household there may be good reasons for choosing a variable interest rate, but for the economy as a whole it would probably be good if we could limit the proportion of variable rates," says Mr Flodén.
He thinks that, from his monetary-policy perspective, the most welcome proposal would be measures that lead to a more effective housing market, and in particular to increased housing construction. Such measures can stimulate the economy in the short term at the same time as they are structurally justified.
Follow the link for a summary of Martin Flodén's view of some measures that can be taken to manage the high household debt and the slides he showed during his presentation.
