Krona at weakest level in six years

The value of the Swedish krona dropped further in overnight trading ahead of Wednesday’s opening of markets in Europe, trading at 10.15 kronor per euro and 7.95 kronor per US dollar.

Krona at weakest level in six years
Graphic: Riksbank; Andrzej Pobiedzinski; The Local

Sweden’s currency has weakened by 12 öre against the euro and 36 öre against the dollar since Tuesday afternoon and is now trading at levels not seen since 2002.

“It’s a result of technical factors. It doesn’t have anything in particular to do with news from Sweden, but rather is a reflection of the financial uncertainty,” said Robert Bergqvist, the chief economist with SEB bank, to the TT news agency.

According to Berqvist, the dollar’s surge in value relative to the krona is a result of large capital flows heading back into the United States as different financial institutions have made adjustments in their portfolios.

“And that means there’s more demand for dollars. When you have powerful movements against the dollar, the krona to euro [exchange rate] usually follows suit. There’s nothing specific,” he said.

Nevertheless, Bergqvist describes the drop in the krona’s value as rather large.

“If you put it in perspective with what’s happened in recent months, it’s a pretty strong shift we’ve just had, in particular against the dollar,” he said.

The krona hasn’t been this weak since the summer of 2002, according to the Total Competitiveness Weights (TCW) index which measures the krona’s value against a basket of other currencies.

“And the fall against the dollar will likely continue,” said Swedank currency analyst Karl-Johan Bergström.

The reason is that the outlook for the global economy has weakened substantially, which causes investors to move their money to dollar-denominated investments.

He adds that the krona’s weakening against the euro is due to the fact that Sweden’s growth forecasts have been lowered further than that of the Eurozone.

“This is been happening continuously for the last six months,” said Bergström.

However, he thinks that the krona’s drop against the euro has started to go too far.

“Against the euro, the krona feels undervalued now,” he said.

He doesn’t think the unusually weak krona will have any large effects on inflation or Swedish exporters ability to sell more their wares abroad.

“It could strengthen exports but at the same time demand is weak,” said Bergström.

And when it comes to inflation, Bergström believes that the falling price of raw materials will counteract any rise in import prices, which one might expect to also generate domestic inflationary pressures.

“The net result ends up being that inflation drops back,” he said.

In addition, belives Bergström, the Riksbank has other considerations besides inflation ahead of Wednesday’s interest rate decision, which will be made public on Thursday.


Sweden’s Riksbank raises rates above zero for first time since 2014

Sweden's central bank has increased its key interest rate to 0.25 percent, marking the first time the rate has been above zero for nearly eight years.

Sweden's Riksbank raises rates above zero for first time since 2014

In a press release announcing the move, the bank said that it needed to take action to bring down the current high rate of inflation, which it predicts will average 5.5 percent in 2022, before sinking to 3.3 percent in 2023.

“Inflation has risen to the highest level since the 1990s and is going to stay high for a while. To prevent high inflation taking hold in price and wage developments, the directors have decided to raise interest rates from zero to 0.25 percent,” it said. 

The Riksbank, which is tasked by the government to keep inflation at around two percent, has been caught off-guard by the speed and duration of price rises.

Just a few months ago, in February, it said it expected inflation to be temporary, predicting there was no need to increase rates until 2024.

The last time the key inflation rate was above zero was in the autumn of 2014. 

In the press release, the bank warned that the rate would continue to increase further in the coming years. 

“The prognosis is that the interest rate will be increased in two to three further steps this year, and that it will reach a little under two percent at the end of the three-year prognosis period,” it said. 

According to the bank’s new future scenarios, its key interest rate will reach about 1.18 percent in a year, and 1.57 percent within two years. 

In a further tightening of Sweden’s monetary policy, the bank has also decided to reduce its bond purchases. 

“With this monetary policy we expect inflation rates to decline next year and from 2024 to be close to two percent,” the bank wrote. 

Annika Winsth, the chief economist of Nordea, one of Sweden’s largest banks, said the rate hike was “sensible”. 

“When you look at how inflation is right now and that the Riksbank needs to cool down the economy, it’s good that they’re taking action – the earlier the better. The risk if you wait is that you need to righten even more.” 

She said people in Sweden should be prepared for rates to rise even further. 

“You shouldn’t rule it out in the coming year. Then you’ll have a once percentage point increase which will go straight into fluctuating mortgage rates.”