December 1, 2017 / 11:53 AM / a year ago

UPDATE 1-Swedish central bank's Floden sees small effects from tighter mortgage rules

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STOCKHOLM, Dec 1 (Reuters) - Sweden’s government was right to go ahead with tighter mortgage rules even if they have a bigger effect on house prices and the economy than the modest impact currently expected, central bank Deputy Governor Martin Floden said on Friday.

The minority coalition government on Thursday gave the financial watchdog the green light to impose tougher mortgage repayment rules despite signs the housing market has peaked.

Floden said the Riksbank’s main scenario was that the effect would be small. The Financial Supervisory Authority has said it expects house prices to fall by around 1.5 percent, but some analysts have warned of bigger falls.

“It could be the case that the mortgage repayment regulation has a bigger effect than that we have in our main scenario, but even then I think it is right to introduce it,” Floden told reporters.

He said rules forcing big borrowers to pay off more of their loans each year should have been introduced earlier and dismissed arguments that the timing now was wrong.

“We have a strong development in the economy, the economy in the euro zone is beginning to pick up and things in general are looking pretty good,” Floden said.

“So from the point of view of the economy, if there is going to be a slowdown (in house prices), it is better that it happens now than later.”

After a 20-year bull run, Sweden’s housing market has stumbled in recent months, raising concerns that tougher regulations could deepen a fall in property prices.

A sharp decline could complicate an already difficult situation for the Riksbank. The crown could weaken, pushing up inflation just as the economy slows.

Floden said this, while not the central bank’s main scenario, would leave the Riksbank weighing opposing inflationary forces - higher import prices but a slower domestic economy - when setting monetary policy.

“And in such a situation there isn’t a clear answer to what we would do,” he said.

The Riksbank was criticised for raising rates too fast in 2010 and 2011 to curb rising household debt, despite tame inflation and growing concern over Greece and the euro zone.

Underlying inflation fell virtually to zero in 2014, and has only just recovered to near the 2 percent target, and the Riksbank has been forced to cut rates deep into negative territory to push up prices and restore confidence in the inflation target.

The current repo rate of -0.50 percent is widely seen as out of sync with an economy growing at around 3 percent.

Reporting by Simon Johnson; Editing by Niklas Pollard and Susan Fenton

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