Sweden’s Central Bank, Riksbank on Wednesday lifted its key policy rate to 3.50% from 3.00%. The move followed the ECB’s 50bps move last month and was expected. Borrowing costs in Sweden are now at the highest level since December 2008, in an attempt to bring down inflation. The annual inflation rate in Sweden surged to 12.3% in December 2022, the highest since February 1991, well above the central bank’s target of 2 percent. The move was not unanimous First Deputy Governor Anna Breman and Deputy Governor Martin Floden preferred to raise rates by 25bp at Wednesday’s meeting.

Looking ahead, the policy rate is expected to be raised further. The Riksbank said the policy rate will probably be raised further by 0.25 percentage points in June or September, with its new rate path now implying the rate will peak at around 3.65%, from around 3.3% previously, and remaining at that level for the next couple of years.

Defending the Krona

The Swedish krona turned lower after the Riksbank raised its key interest rate as widely expected but signaled it would slow the pace of rate rises at upcoming meetings. Sweden’s central bank expects to lift rates 25bp in June or September. EUR/SEK rose to 11.3874 after the decision from 11.2965 beforehand.

The market latched onto Riksbank saying First Deputy Governor Anna Breman and Deputy Governor Martin Floden preferred to raise rates by 25bp at Wednesday’s meeting. Governor Thedeen kept pointing to the need for a stronger krona, but the dovish tilt makes SEK-supporting efforts harder. They both argued in favor of a 25bp hike today and against the rate path projections, which they judged too hawkish in light of “well-anchored inflation expectations, moderate wage increases and the weak and downward-revised forecast for domestic demand”.

The krona prior to the previous month’s meeting had dropped to its lowest against the euro since 2009, in the wake of the ECB’s hiking. 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,” officials have said previously. “A stronger krona would be desirable.”

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

Selling Bonds

The central bank will in April begin to cut its asset holdings at a faster pace, selling 3.5 billion kronor ($340 million) a month in government bonds but holding on to other debt assets. 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 said.

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

Riksbank gave an upward revision in CPI and CPIF inflation – especially the core measure (excluding energy) – as well as for the size of the GDP contraction in 2023 (from -1.1% to -0.7% year-on-year). The annual inflation rate in Sweden eased to 10.6% in March 2023 from 12% in the previous month and below expectations of 11.1%. It was the lowest reading since August 2022. The annual inflation rate in Sweden surged to 12.3% in December 2022, the highest since February 1991.

On a monthly basis, consumer prices rose 0.6%, down from a 1.1% jump in February and below market estimates of a 1% gain.

Prices slowed for most sub-indexes, mainly food & non-alcoholic beverages (19.7% vs 21%), housing & utilities (16.4% vs 18.4% in February), and transport (3% vs 5.8%). Also, inflation was lower in furnishings & household goods (12.9% vs 13.2%), recreation & culture (7% vs 8.3%), and miscellaneous goods & services (6.9% vs 7.4%).

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.

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