Riksbank to boost foreign currency reserves

The Swedish krona weakened somewhat on Wednesday following an announcement from the Riksbank that it planned to borrow 100 billion kronor of foreign currency.

Riksbank to boost foreign currency reserves

Throughout the financial crisis, the Riksbank has loaned tens of billions of kronor worth of foreign currency to Swedish banks in order to help ensure their liquidity.

But now the Riksbank wants to replenish its foreign currency reserves in case further liquidity assistance is needed, the Riksbank said in a statement on Wednesday.

In addition to making a number of US dollar loans to Swedish banks to maintain liquidity during the ongoing financial crisis, the Riksbank has also entered into swap agreements with the central banks of Iceland, Estonia and Latvia.

“We still need to be prepared for the eventuality that the financial crisis may be both severe and prolonged. This is why we need to strengthen the foreign currency reserve. This is part of our work to safeguard financial stability,” said Riksbank governor Stefan Ingves in a statement.

The Riksbank said it plans borrow the funds from the Swedish National Debt Office (Riksgälden), adding that the boosting of its foreign currency reserves is “temporary” and will be phased out along with other measures currently in place to mitigate the effects of the financial crisis.

But Johan Javéus, head currency strategist with SEB Merchant Banking, questioned how great an effect the move would have.

“The liquidity effects will be negligible,” Javéus told the Direkt news agency.

“We’re talking about interest payments on borrowing and that’s not big enough amount to affect the krona, especially in the short-term.

He added that Riksbank’s actions could add to concerns that the bank knows about worrying developments in the Baltics of which the general public is not yet aware.

However, Javéus theorized that speculation over what the Riksbank may know could put pressure on the krona, although currency movements thus far have been marginal.

Shortly after 4pm on Wednesday, the krona was trading at 7.65 kronor to the dollar, down about 1.5 percent from the opening level of 7.55 kronor per dollar.

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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.”