Sweden’s central bank is watching the krona as it predicts the currency’s recent gains are coming to an end, First Deputy Governor Kerstin af Jochnick said.
The krona’s impact on prices is “important,” af Jochnick said yesterday in an interview in Stockholm. “There are fundamental factors for why the krona is at about this level. We think that it will remain at about this level.”
The bank is stepping up its efforts to bring price growth close to the targeted 2 percent after failing to reach its inflation goal since 2011. Annual headline inflation accelerated to zero in March from minus 0.2 percent a month earlier. Governor Stefan Ingves, who in a February interview said he was “happy” with the krona’s strength, this month acknowledged the bank won’t reach its price target next year.
The bank on April 17 kept its repo rate at 1 percent, while pushing back a planned tightening cycle until the second half of next year. Five days later, Deputy GovernorLars E.O. Svensson said he was stepping down after criticizing what he called “poor” price target attainment at the Riksbank.
“We have to make sure to become even better at reaching the inflation target,” af Jochnick said. The krona is “important for inflation. It’s important for us to continue to monitor” the exchange rate, she said.
Price growth has stalled as the krona has gained. Sweden’s currency has soared 27 percent against the euro since the end of 2008, pushing import prices lower. A report from the Statistics Office today showed the producer price index slid 4.4 percent in March from a year earlier, with the import price component dropping 7.4 percent.
The krona today slid 0.6 percent to 10.1679 against the U.K. pound and 0.1 percent versus the Norwegian krone today as of 3:03 p.m. in Stockholm. Sweden’s December repo rate futures slid to 0.79 percent, the lowest since Jan. 16.
The Riksbank last week lowered its forecast for inflation this year to 0.1 percent after the krona gained 6 percent against the euro since May last year. The bank sees prices rising 1.4 percent next year, down from a February forecast for 2.1 percent.
“A lot of things have happened in the last five years that were very difficult for us to predict,” af Jochnick said. The Riksbank’s decision to pay closer attention to the krona will dent its image as a one of the few central banks to avoid currency wars. Still, af Jochnick said Sweden’s strong currency is a reflection of a healthy economy.
“It, of course, also puts demands on Swedish industry, and there are adjustment demands there, but those would probably have occurred anyway,” she said. “We have very low demand, not least from Europe, and we’re dependent on European growth picking up. That’s what will help us to also get Swedish growth going.”
Sweden, which exports half its economic output and sends 70 percent of sales abroad to Europe, will expand 1.4 percent this year after growing 0.8 percent in 2012, the Riksbank estimates. Unemployment will average 8.2 percent this year, versus 8 percent in 2012, it said. The bank cut rates four times since December 2011 over the following 12 months before shelving its easing cycle.
“We can of course cut further, but you also have to consider what kinds of problems we have in the labor market and quite a lot of the problems we’re seeing there are of a structural nature,” af Jochnick told reporters. “We also have household indebtedness, which of course has been part of what we’re considering.”
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