(Bloomberg) -- Sweden needs to reduce its households’ and property companies’ sensitivity to higher interest rates and other changes as the nation narrowly escaped a more adverse scenario during a bout of inflation that is now subsiding, Riksbank Deputy Governor Aino Bunge said.   

To avoid more severe problems in future episodes of high inflation, Bunge said on Thursday measures are needed to ensure that all sectors of the economy can cope with faster price increases and higher interest rates. Sweden’s housing market as well as its commercial property market has proven especially vulnerable and she also called for more transparency in how property companies value their assets.

“There must be conditions for monetary policy to do the job for which it has been given responsibility, without problems arising in some parts of the economy – and in the worst case in the financial system – as a result of behavior that is too short-term and too risky,” Bunge said in a speech at a commercial real estate seminar in Stockholm.

Bunge said that inflation targeting “seems to have passed the test quite well,” as Sweden’s economy has avoided an “excessive slowdown” as well as financial stability problems, with price increases are cooling and the Riksbank having embarked on a series of rate cuts.

“The development of the real economy could have been much worse,” Bunge said. “Especially if the trend we saw of increased indebtedness in some sectors, including the property sector, had continued for a number of years before inflation rose.”

Read More: Riksbank Kicks Off Easing With First Rate Cut Since 2016

Additional Comments

In comments to reporters after the speech, Bunge said:

  • April inflation data confirmed the development the bank saw at its latest meeting and a June cut remains unlikely.
  • The Swedish krona’s development remains one of the main risks that could lead to higher inflation, although the effect of the exchange rate may become less pronounced as companies’ pricing behavior normalizes.
  • While there is “light in the tunnel” for indebted commercial real estate companies and financing conditions have improved, they still need to take measures to strengthen balance sheets and it’s too soon to say the sector is out of the woods.

(Adds comments from Bunge in bullet points.)

©2024 Bloomberg L.P.