Sweden’s krona strengthened to a 15- month high against the U.S. dollar after Riksbank’s First Deputy Governor Kerstin af Jochnick said the central bank will stay vigilant on household debt when setting interest rates.
The krona rose as much as 0.79 percent versus the dollar to 6.4392, the strongest since Oct. 31, 2011, and traded at 6.4490 as of 1:25 p.m. in Stockholm. It gained 0.14 percent against the euro to 8.6711.
In the absence of a clear framework for macroprudential policy, the Riksbank “has discussed the risks linked to the high level of household debt in Sweden” as it “wanted to avoid the consequences that many other countries have experienced as a result of high indebtedness and falls in house prices,” af Jochnick said in a speech today. Once macro-prudential policy is up and running, it will “be in a better position than monetary policy to manage these risks, as it offers tools that are more effective than the repo rate for these purposes,” she said.
Sweden should set up a macroprudential council to better spot risks and prevent future financial crises, a government- appointed committee recommended on Jan. 23. The council should be established by law to help cooperation between the Financial Supervisory Authority and the Riksbank, the committee said.
“Af Jochnick’s comments shows that the Riksbank probably needs to consider financial stability more in the future, and gives a less dovish picture, as too many rate cuts could risk boosting household debt growth too much,” Karl Steiner, a currency strategist at SEB AB in Stockholm, said in an e-mailed response to questions today. “Our conclusion of her speech is that the recommendations for macro-prudential supervision are not yet regarded as good enough for the Riksbank to stop taking risks in regards to financial stability into consideration.”
Swedish politicians such as Finance Minister Anders Borg are concerned about the currency’s strength and its corrosive effects on economic growth as exporters are already struggling to cope with slumping demand from Europe, the nation’s largest export market. Borg said this week that the Riksbank’s policy is propping up the krona and preventing the exchange rate from helping to sustain an expansion.
Still, Sweden’s central bank has the ammunition it needs to prevent Swedish krona gains from triggering a deflationary trap, the Riksbank’s Deputy Governor Karolina Ekholm said in a Bloomberg interview on Jan. 22.
“We should continue to make sure that we behave, that we have good public finances and that we have a banking sector that’s stable -- it’s the confidence in Sweden that’s reflected in how strong the krona is,” af Jochnick told reporters in Stockholm today. “We don’t think the krona will strengthen that much but think the krona will remain at around this level.”
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