Something interesting is happening in Sweden. The land that gave birth to the world’s first ever central bank may well turn out to be where the faith in central bank authority dies.

The Swedish central bank has been fighting falling prices for years. Consumer prices started declining on an annualized basis in 2012, prompting the normal flawed response from a central bank — lower interest rates, which they hope would stimulate demand and lead to increasing prices. In fact, the Swedish central bank lowered its official interest rate to below zero at the start of 2015 and it has stood at -0.50% since the beginning of 2016. Consumer prices started rising again in 2016, and the current annualized rate stands at 1.90%. Cue celebrations all round? Well, not quite.

You see, now Sweden’s property market is showing signs that falling prices are setting in. As the chart below displays, apartment prices in Stockholm have declined sharply over the last few months — down around 9% – and bankers are voicing concerns over further declines spreading around the country. When a property slump takes hold, especially after such a boom that Sweden has seen since 2009, depressed prices can dominate for a long time. When the authority that people look to in order to help them out loses credibility, it could be devastating.

We think it is wrong, but the belief that central banks can control prices through monetary policy is all pervasive. So whether or not we believe it or not is immaterial — the fact that the vast majority of people still believe it is what counts. So what will the people of Sweden think if their property slump deepens? Will they demand that the central bank lower interest rates to -1%? Perhaps -2% would work. Or -5%?

What is happening in Sweden now may be the first real test of a major central bank’s credibility. What do they do when they have no monetary policy tools left to feed the myth of their omnipotence? There will be a point at which belief that central banks can control prices turns to disbelief that they can’t. At that time, prices of most assets should collapse.

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