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Sweden’s central bank kept its rates on hold at record low levels after its February policy meeting and explicitly stressed its willingness to intervene to weaken the krona, as a strengthening currency threatens its long-sought uptick in inflation.
The Riksbank’s executive board kept its benchmark interest rate at -0.5 per cent, and made no changes to its bond-buying programme.
In a dovish move, the bank also stressed that a further rate cut is more likely than a rise in the short-term, despite the strength of the Swedish economy.
Economists at ING had predicted that an “intentionally” dovish position could be taken to discourage further appreciation in the krona, and today the Riksbank extended its mandate to allow “quick intervention on the foreign exchange market”.
The central bank said:
To ensure inflation stabilises around the target, it is necessary for economic activity to remain strong and for the krona to appreciate at a not too rapid pace. The political uncertainty abroad is enhancing the need for monetary policy to remain expansionary.
Low interest rates encouraged Sweden’s currency to fall to levels not seen since the financial crisis last year, a drop that Riksbank governor Stefan Ingves welcomed as a way to push up the cost of imports and boost the country’s stubbornly low inflation rate.
However, increasingly hawkish signs from within the executive committee since December’s split vote on whether to extend quantitative easing have helped the krona rally more than 6 per cent from its November lows.
The executive board was unanimous in its decision on the repo rate and quantitative easing, but deputy governor Martin Flodén, who has a reputation as one of the more hawkish members of the Riksbank’s board, entered a reservation against the decision on the possibility of currency interventions.
The krona fell back against the euro after the news. It was 0.15 per cent weaker for the day at publication time, having been in positive territory before the decision.
Andreas Wallström, chief analyst at Nordea, said he expects Sweden’s core inflation rate, which isn’t affected by volatile energy prices, will “likely continue to be a challenge for the Riksbank”, adding:
Against this background, together with the long history of undershooting the target, it is hard to see the RIksbank raising its policy rate anytime soon. We have pencilled in a first rate increase in April 2018 and a second one later that year, leaving the repo rate at 0.0 per cent at the end of 2018.
The Swedish statistics agency will release its latest inflation data on Friday.