Central banks in Switzerland, Sweden and Norway have all voiced concerns about overheating in their housing markets. In Switzerland, macro-prudential policies have already served to cool house price inflation and there is scope to do more. This should allow the SNB to keep interest rates at record lows. In Sweden, high house price inflation has been accompanied by a pick-up in broader inflationary pressures, suggesting that interest rate hikes are warranted. In contrast, macro-prudential policy tightening should allow the Norges Bank to cut interest rates further. But the Government controls those policies and if it fails to act, the Norges Bank might feel unable to keep interest rates as low as it would like. This presents a downside risk to our growth and inflation forecasts.
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