Sweden's Central Bank Is Already Fighting the Next Bubble

While most of the world's central banks are still fighting the last war, it's worth noting that the oldest one, Sweden's Riksbank, has moved on to fighting the next one, possibly setting a course for other fiscal policymakers to follow. Rather than looking at conventional inflation gauges and targets, the Riksbank is looking at asset-price growth in an effort to prevent the next bubble, Bloomberg reports.

As many writers and readers on DailyFinance have often noted, while consumer prices have remained low lately, other prices are increasing rapidly. Yet central banks in the U.S., the eurozone, Japan and the U.K. are keeping interest rates at record-low levels with aggressive loose monetary policies that critics say could lead to damaging new bubbles as standard inflation gauges fail to capture asset-price growth.

In Sweden, the situation is no different: Inflation there remains below the bank's 2% target. But housing prices have moved above pre-crisis levels, rising for a 19th consecutive month in November and gaining at an annual rate of 5%, Bloomberg reports. Meanwhile, credit is growing at a 9% rate. In response, The Riksbank has actually raised its repurchase agreement rate four times since July, to 1.25% in December, trying to slow credit and economic growth in an effort to prevent another boom in house prices.

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In the U.S., where housing prices just recorded another drop in October, the Federal Reserve has kept its main benchmark rate in the zero to 0.25% range since December 2008, and it added to that fiscal stimulus with two rounds of quantitative easing to keep yields low.

Not all policymakers in Europe and the U.S. agree with the current low-rate policies, and some have been quite vocal about their concerns. Kansas City Fed President Thomas Hoenig, who has consistently voted against the Fed's loose monetary policy, said this month that a "continued high level of monetary accommodation" could "destabilize the economy."