The Riksbank’s roadmap to currency intervention

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Minutes from the Swedish central bank’s extraordinary meeting on January 4th shed some light on to how any interventions to weaken the krona might work.

To recap, in the Riksbank’s words (you can reach its statements here):

The Riksbank does not have a target for the exchange rate. However, the value of the Swedish krona in relation to the most important currencies is an important factor in assessing inflation. A rapid strengthening of the krona may therefore need to be counteracted by an even more expansionary monetary policy.

Heavy lifting by the central bank so far, in the form of rate cuts and a big-for-Sweden QE programme, are just not having the desired effect on the krona, which continues to hold firm, particularly against the neighbouring euro. The Riksbank says today:

This development is expected to comprise a major risk of bringing the upturn in inflation to a halt and preventing inflation from stabilising around 2 per cent.

“As a complementary measure”, therefore, the central bank says it “may need to intervene on the foreign exchange market.”

Foreign exchange interventions do not aim to influence the long-run krona exchange rate, but to counteract an overly rapid strengthening before inflation has stabilised around 2 per cent. The foreign exchange transactions made within the framework of these interventions are a means of upholding the inflation target and continuously safeguarding price stability.

Interventions shall therefore only take place as long as they are considered necessary to ensure that developments in the krona exchange rate do not comprise a serious risk to the upturn in inflation. The Riksbank still has a high level of preparedness to make monetary policy even more expansionary, even between the ordinary monetary policy meetings. In addition to foreign exchange interventions, the repo rate can be cut further and the Riksbank can purchase more securities. In addition, there is scope to launch a lending programme to companies via the banks should this be necessary.

Investment firm GAM says (in a report you can read here) that the central bank “has an obsession with inflation.” The krona “should strengthen”, it said, adding (with our highlights):

On most metrics the currency remains ‘cheap.’ The trade-weighted krona remains below its five-year average, GDP growth has been outstripping that of the countries making up the basket and the current account surplus (as a percentage of GDP) has been rising over the past five years.

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