Runaway krona must be ‘reined in’: experts

The Swedish krona is 25 percent overvalued against the US dollar, according to the OECD, jeopardizing the currency's appeal as a “safe haven” for investors.

Runaway krona must be 'reined in': experts

The krona, as well as the Norwegian krone, are more overvalued than they’ve been at any point in the last 40 years, the Bloomberg news agency reports.

“Those currencies need to depreciate,” Peter Von Maydell, head of foreign-exchange strategy at Credit Suisse Securities in London, told Bloomberg.

Last week, the Riksbank cut Sweden’s benchmark interest rate, the repo rate, by 0.25 percent to 1.50 percent, amid concerns about weak exports.

The bank’s acknowledgment that the rising krona may have hurt Swedish exports marks a reversal from late 2010, when Riksbank governor Stefan Ingves had rejected calls to manage the rising krona as spooked investors sought safety with the Swedish currency due to uncertainty about the future of the euro.

“We have a uniquely strong economic development in Sweden,” Ingves said in late 2010.

But the Riksbank has now cut rates at two consecutive meetings, and made several downward adjustments to its forecast for future interest rate levels.

Among the reasons cited for the Riksbank’s February 16th rate cute was “sluggish growth in the euro area” which had depressed demand for Swedish exports.

According to Bjoern-Roger Wilhelmsen, chief interest-rate and currency strategist at Swedbank in Oslo, “there are limits” to how much the Swedish krona can appreciate before the Riksbank would be forced to enact monetary policy responses to keep the currency’s value in check.

As the Swedish krona is one of the least traded currencies, it is more sensitive to sudden swings, meaning that a depreciation could quickly become more severe should institutional investors decide to dump krona-denominated holdings.

Member comments

Log in here to leave a comment.
Become a Member to leave a comment.


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.”