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Riksbank Puts Krona on Agenda to Temper Debt Focus, Minutes Show

Minutes from the latest Swedish interest rate decision revealed a growing preoccupation with the krona’s strength even as most board members voiced concern that household debt levels remain “high.”

“The members raised the question of the Swedish krona and its significance for the economy and inflation, as well as whether monetary policy should take into account the risk of high debt,” the bank said in the minutes of its last meeting. The minutes had 16 mentions of the word krona, compared with six citations in the minutes from February.

“Goods prices have fallen due to the weak development of prices abroad and the stronger krona,” Governor Stefan Ingves said in the minutes. “The world thus appears to be divided in this respect, but the executive board can only set one interest rate. While developments abroad and the exchange rate are holding down goods prices, interest-rate policy is helping to push up service prices.”

Yet the majority on the six-member board said the “high level” of household debt should be taken into account when setting rates. The bank kept its main lending rate at 1 percent for a second meeting on April 16 after cutting four times since December 2011. The bank pushed back plans for a rate increase to late 2014, citing a strengthening krona and the inability of companies to raise prices because of weak demand. It had forecast it would raise rates in the first quarter of next year.

Krona Dynamics

The krona has gained more than 6 percent against the euro since May after the country emerged as a haven from Europe’s debt crisis. Sweden’s public debt was 37.7 percent of gross domestic product last year, compared with the euro-area average of 93.1 percent, according to the European Commission.

The krona gained 0.1 percent to 8.5541 per euro as of 11:17 a.m. in Stockholm. It rose 0.6 percent versus the dollar to 6.5347.

“We will continue to look at debt dynamics,” Christin Tuxen, a senior analyst at Danske Bank A/S, said in a note. “If credit growth rises again, which is quite likely, the majority will be concerned. Hence, the upside for the euro/krona rate should be limited.”

The Riksbank estimates household debt will swell to more than to 177 percent of disposable incomes next year after almost doubling since the mid-1990s. The bank cut its forecast for inflation to 0.1 percent from 0.4 percent for this year and to 1.4 percent in 2014, from 2.1 percent previously. It predicted the economy will grow 1.4 percent in 2013 and 2.7 percent in 2014.

‘Always Difficult’

Ingves said in the minutes that it “is always difficult to forecast the exchange rate and the monetary policy update assumes that no significant changes in the development of the krona will take place during the forecast period.

“If development takes a different course and, for example, the krona strengthens significantly and the forecast for inflation is affected, the executive board may need to react to this,” he said. “The same applies if the krona were to weaken significantly.”

Two of the board’s six members, Lars E. O. Svensson and Karolina Ekholm, pushed for a lower rate to boost economic growth hurt by sluggish demand for Swedish exports from Europe. The country exports about half its $500 billion output, of which about 70 percent goes to Europe. Svensson said last week he won’t seek re-election when his six-year term runs out next month, citing a failure to convince the board that deeper cuts would reduce unemployment and lend more credibility to its inflation target.

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