Sweden’s Riksbank Raise Rates by 25 bps, Krona Falls to New Record Low Against Euro

Sweden’s Central Bank, Riksbank on Thursday lifted its key policy rate to 3.75% from 3.50%. The move followed the ECB’s 50bps move last meeting and was expected. Borrowing costs in Sweden are now at the highest level since December 2008. The Swedish krona hit a new record low versus the euro immediately after the announcement. While inflation in Sweden has decelerated in recent months it is well above the central bank’s target of 2 percent.

The central bank kept its forecasts on price growth largely unchanged, seeing its key target metric slowing to 2.4% next year and 1.8% in 2025.

Looking ahead, the policy rate is expected to be raised further. The executive board led by Governor Erik Thedeen lifted its policy rate by a quarter point to 3.75%, and said it expects to increase the rate “at least one more time” this year.

Sweden Interest Rate

Defending the Krona

Following the report NOKEUR weakened to more than 11.82 kronor per euro, the currency pared some of the losses, trading 0.2% lower at 11.7959 at 12:26 p.m. in Stockholm. The moves follow a long period of decline that is making it harder to fight inflation as the cost of imported goods rises.

The bank is determined to bring down inflation, and keeping the krona in check is an important part of that strategy, at the cost of a marked downturn in the economy. If the krona continues to be weak, it will be considerably more difficult for the Riksbank to sustainably return inflation to the target.

SEK depreciation, and the fear of falling behind the ECB and other central banks as they aggressively tighten rates are impacting the decisions also.

The central bank also announced it is considering to partly hedge its foreign exchange reserves, a measure that Thedeen said is aimed squarely at reducing financial risks and shouldn’t be seen as “currency intervention in disguise.”

“If the currency strengthens, in line with our strong belief, we will lose a lot of money, and we have a duty to take that risk into consideration,” the governor said. “Any potential transactions will follow a very transparent pattern, in stark contrast to how interventions are typically conducted.”

Selling Bonds

The central bank will also unwind asset holdings faster than previously planned by expanding monthly government bond sales to 5 billion kronor ($462 million) from 3.5 billion, which it said could contribute to a stronger krona. Debt sales, as well as an increase in the Riksbank’s offering of certificates, should facilitate foreign investment in Swedish assets and could contribute to a stronger krona the bank believes.

New Man in Charge

Thedeen is the former chief financial regulator in Sweden, and took office on Jan. 1, joining new Deputy Governor Aino Bunge, who started in December. Governor Stefan Ingves stepped down in December, and this decision was the first since 2005 without him in charge.

Inflation is the Issue

“Inflation remains far too high, and in parts of the economy, demand is also strong, which fuels inflation,” Thedeen said at a news conference in Stockholm. “We will do what it takes to lower inflation rates within a reasonable time frame.”

Sweden Inflation Rate

In May CPIF inflation, which strips out the impact of interest rate changes, stood at 6.7%, as prices on services such as restaurant meals and hotel stays rose at a rapid clip. The bank aim to bring the CPIF inflation rate back to 2%. The central bank kept its forecasts on price growth largely unchanged, seeing its key target metric slowing to 2.4% next year and 1.8% in 2025.

“The increase in service prices is unexpectedly strong, showing no clear tendency that inflation is slowing,” Thedeen said. “This is very worrisome. It could indicate that the inflation rate is declining at a slower pace than we believed it would, and that it may remain at levels that are too high.”

Previous Governor Stefan Ingves conceded back in September that after underestimating inflation, small increments in rate hikes may not suffice. He also said that previous guidance for a half-point hike this week is no longer valid. The bank signaled that the rate would continue to rise for the next six months.  The decision followed two consecutive rate increases at lower magnitudes, made to fight inflation that currently stands at an over 30-year high and to support a krona that approached its record low hit in 2001.

Economic Growth

Parts of the Swedish economy have withstood rising borrowing costs better than expected, with exports buoying growth, and employment levels continuing to rise. Sweden’s troubled commercial real estate sector like most country’s is worse hit.

The Riksbank now projects economic output to contract by 0.5% this year, which is an upward revision from its previous forecast for a 0.7% drop in gross domestic product.

Monetary Policy Report, April 2023

Inflation is still far too high and underlying inflation has been much higher than expected during the first months of the year. For inflation to fall and stabilise at the target within a reasonable period of time, the Executive Board has decided to raise the Riksbank’s policy rate by 0.5 percentage points to 3.5 per cent. The forecast indicates that the policy rate will probably be raised further by 0.25 percentage points in June or September.

Inflation is still far too high and far from the inflation target. The high inflation has a negative effect on the whole economy, but particularly affects households that have small margins. For inflation to fall and stabilise around the target within a reasonable period of time, the Executive Board has decided to raise the policy rate by 0.5 percentage points to 3.5 per cent.
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Because of the rapid upturn in inflation, the Riksbank has raised the policy rate unusually rapidly since April 2022, from zero per cent to 3.0 per cent in February 2023. The rate increases have not yet had full impact on economic activity and inflation. But the effects are becoming increasingly clear and CPIF inflation has fallen in recent months, roughly in line with the Riksbank’s latest forecast. However, the downturn is due to falling energy prices. CPIF inflation excluding energy has been much higher than in the Riksbank’s forecasts during the first months of the year.
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It is important for confidence in the inflation target that inflation falls back. Low and stable inflation is a necessary condition for good economic development and real wage increases. Monetary policy is therefore still aimed at bringing inflation to the target within a reasonable period of time. To ensure that this happens, the policy rate needs to be raised further.
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The forecast for the policy rate has been revised up and indicates that the policy rate will most likely be increased by a further 0.25 percentage points in June or September. Monetary policy has a tightening effect on the economy and the Executive Board assesses that following the April meeting there will be scope to adjust the policy rate in smaller steps. However, there is still considerable uncertainty and new information and how it is assessed to affect the economic outlook and inflation prospects will be decisive for the conduct of monetary policy.

Source: Bloomberg, TC, Riksbank

From The TradersCommunity Research Desk

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