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Swedish Rate Path Risks More Krona Gains, Ekholm Says

A flag of the Swedish Central Bank flies from a flagpole outside the building in Stockholm on  Nov. 18, 2008. Photographer: Casper Hedberg/Bloomberg
A flag of the Swedish Central Bank flies from a flagpole outside the building in Stockholm on Nov. 18, 2008. Photographer: Casper Hedberg/Bloomberg

Sept. 29 (Bloomberg) -- Sweden’s central bank risks fueling a krona appreciation that will prevent inflation from reaching its target if it sticks to the current tightening forecast, Deputy Governor Karolina Ekholm said.

“I expect pretty low rates in the U.S. and the euro area and there’s a risk that if we proceed with very quick rate increases there may be a pretty strong appreciation of the krona and that’s something that can push down inflation in the future,” Ekholm said in an interview in Stockholm today.

Sweden’s central bank this month raised its benchmark repo rate a quarter point to 0.75 percent in part, it said, to cool the housing market. Inflation, which has lagged behind the bank’s 2 percent target since December 2008, slipped 0.2 point to 0.9 percent last month. Rate rises in Sweden, which emerged from an eight-month bout of deflation last year, have helped send the krona 12 percent higher against the euro this year as investors chase higher yields.

“We would achieve our targets better if we reduced” the rate path “about a percentage point toward the end of our forecast horizon” in 2013, Ekholm said. Sluggish recoveries in the U.S. and euro area “will have a certain downward pressure both on inflation and resource utilization.”

The Riksbank’s current rate path shows the repo rate averaging 3.8 percent in the third quarter of 2013. Swedish house prices increased for a 16th consecutive three-month period in August, jumping an annual 6 percent, Statistics Sweden said on Sept. 16.

‘Raises Tone’

“This raises the tone of the discussion” amongst Riksbank board members, said Annika Winsth, chief economist at Nordea Bank AB, the biggest Nordic lender. “There is a chance that Karolina may get it right, that they should hike here and now but that they won’t have to go as far as the Riksbank predicts.”

Riksbank Deputy Governor Lars E. O. Svensson, who has voted against his bank’s tightening path, told newspaper Svenska Dagbladet this week that sticking to the current rate path may be “a catastrophe” for Sweden’s economy.

The krona traded 0.1 percent higher against the euro at 9.1794 at 3:07 p.m. in Stockholm, having receded from a gain of as much as 0.6 percent earlier in the day. Against the dollar, the krona was up 0.1 percent, compared with 0.9 percent earlier in the day.

Inflationary Pressures

In its Sept. 2 rate report, the Riksbank said it raised rates because “household indebtedness has increased significantly in recent years.” While inflationary pressures are “currently low,” the bank said price growth will accelerate as “economic activity strengthens.” It expects the economy to grow 4.1 percent this year.

The bank’s current forecast indicates it may raise the main rate a half point by the end of the year to 1.25 percent. Ekholm declined to comment on whether she supports the Riksbank’s near-term forecast.

Ekholm and Svensson are the only two of the Riksbank board’s six members to enter reservations against the rate path.

European Central Bank President Jean-Claude Trichet on Sept. 2 said his bank’s benchmark rate, which has remained at 1 percent since May 2009, is at an “appropriate” level, signaling no immediate plan to tighten monetary policy.

The Federal Reserve on Sept. 21 reiterated plans to keep its main rate “exceptionally low” for an “extended period.” The U.S. benchmark has remained in a range of zero to 0.25 percent since December 2008.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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