Sweden’s Central Bank, Riksbank on Thursday hiked its benchmark rate by 50bps to 3.0 percent during its February meeting. The move followed the ECB’s 50bps move last week 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. Looking ahead, the policy rate is expected to be raised further with almost two more quarter-point moves priced in by June, forward-rate agreements indicate.

Defending the Krona

The Swedish krona jumped as much as 0.9% to 11.2445 against the euro after the announcement, its highest level in nearly two weeks. The krona this week 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 said. “A stronger krona would be desirable.”

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

Inflation is far too high and has continued to rise,” the Riksbank said. “The policy rate will probably be raised further during the spring.”

The annual inflation rate in Sweden surged to 12.3% in December 2022, the highest since February 1991, accelerating from 11.5% in November and slightly above market expectations of 12%. Prices rose faster for most sub-indexes, led by housing and utilities (20.2% vs 17.6% in November), amid higher electricity costs; and food and non-alcoholic beverages (18.2% vs 18.1%), as prices rose for milk, cheese, eggs, meat, bread and other grain products.

Additional pressures came from, recreation & culture (6.3% vs 4.3%), miscellaneous goods & services (5.7% vs 5.5%), and furnishings & household goods (16.3% vs 15.4%). On a monthly basis, consumer prices advanced 2.1%, the sharpest gain since January 1993

Riksbank became increasingly more hawkish after red-hot, 30-yr high inflation at 9.8% y/y in August, still at 9.3% in October. SEK depreciation, and the fear of falling behind the ECB as they aggressively tighten rates are impacting the decisions also.

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, February 2023

Inflation is far too high and has continued to rise. For inflation to fall and stabilise around the target within a reasonable time, the Executive Board has decided to raise the Riksbank’s policy rate by 0.5 percentage points to 3.0 per cent. The policy rate will probably be raised further during the spring. Further, the Executive Board decided that the Riksbank will, with effect from April, sell government bonds to reduce asset holdings at a faster pace.

High inflation creates problems in the economy. To bring down inflation and safeguard the inflation target, the Executive Board assesses that monetary policy needs to be tightened further. The Executive Board has therefore decided to raise the Riksbank’s policy rate by 0.5 percentage points, to 3.0 per cent. The forecast for the policy rate indicates that it will probably be raised further during the spring. As complementary measures to the higher policy rate, the Executive Board has also decided to reduce the Riksbank’s asset holdings at a more rapid pace, by selling government bonds and offering larger volumes of Riksbank Certificates in the weekly monetary policy operations.

Swedish inflation is very high. CPIF inflation rose to just over 10 per cent in December. Even disregarding the rapidly increasing energy prices, inflation was high and still rising. It is important for confidence in the inflation target that inflation falls back clearly this year and there are many indications that it will do so. But it is uncertain whether inflation will fall sufficiently quickly and far enough, not least given the fact that underlying inflation is still rising. Moreover, if the krona continues to be weak, it will be considerably more difficult for the Riksbank to return inflation to the target more permanently.

Although a tighter monetary policy means that economic activity will weaken further in the near term, achieving low and stable inflation within a reasonable period of time is a prerequisite for good growth in the Swedish economy. If inflation is persistently high, the negative consequences for Swedish growth and the labour market will be much greater in the long run. Tightening monetary policy more now reduces the risk of even more serious problems with inflation and greater monetary policy tightening further ahead, with more widespread negative consequences for the Swedish economy.

Source: Bloomberg, TC, Riksbank

From The TradersCommunity Research Desk