PARIS (MNI) – Policymakers at Sweden’s central bank, the Riksbank,
are worried about economic developments in the United States, global
exchange rate trends and the potential for spiraling protectionism,
according to the minutes of the bank’s October 25 monetary policy
meeting published Monday.

The bank’s First Deputy Governor Svante Oberg, summing up the
global outlook, made a presentation to the board in which he said that
economic developments in the U.S. were “troublesome,” according to the
minutes. Based on experience from previous financial crises, “a long
period of dampened GDP growth and high unemployment can be expected n
the United States,” according to the Riksbank summary of Oberg’s
presentation.

In Europe, things are better “but not good,” with only moderate GDP
growth and high unemployment, the minutes noted.

Another risk noted in Oberg’s presentation, is that major economic
divergences across the globe could cause serious problems.

There’s already been a contraction of world trade volumes during
the crisis, while low interest rates in Europe and the U.S. have
produced large capital flows into emerging market economies, which are
pushing up exchange rates and asset prices, according to the summary of
Oberg’s argument.

“There is thus a risk that these countries may attempt to
counteract the appreciation of their own currencies in order to
strengthen their own exports and growth, introducing protectionist
elements into the trade exchange and placing restrictions on capital
flows,” the minutes said, continuing the summary of Oberg’s
presentation. “This may trigger a negative spiral.”

On the other hand, there could be a faster-than-expected recovery
in the U.S. once the housing market there starts to improve, and this
could lead to a rapid increase in yields on U.S. long bonds, the minutes
noted. Since U.S. Treasuries are still a benchmark for other assets
across the globe, “better growth in the United States may therefore
affect long-term interest rates not just in the United States, but also
in other countries, including Sweden,” according to the minutes.

The Riksbank meeting took place before the U.S. Federal Reserve’s
announcement last week that it would buy $600 billion in Treasury
securities to try to pump up economic activity. The minutes also
reiterated the Riksbank view that Sweden’s repo rate would need to be
raised gradually to attain the central bank’s inflation target of 2%,
but that the trajectory of the increase could be less steep than
forecast in September.

The bank repeated that Deputy Governor Karolina Ekholm and Deputy
Governor Lars E.O. Svensson had entered a reservation against the
decision last month to raise the repo rate by 0.25 percentage point to
1.0%, and against the forecast repo rate path, despite its downward
revision.

[TOPICS: M$X$$$,M$$CR$,MGX$$$,M$$FX$]