Sept. 5 (Bloomberg) -- Sweden’s krona weakened the most against the euro in more than two weeks in Stockholm after the Riksbank unexpectedly kept a small probability for an interest rate cut in new forecasts.
The krona weakened as much as 0.77 percent to 8.7734 per euro, the biggest intraday drop since Aug. 21, and traded at 8.7682 as of 12:15 p.m. local time. It slid as much as 1.1 percent to 6.6627 against the U.S. dollar, its weakest level since July 16.
The Riksbank today kept its main lending rate unchanged at 1 percent for a fourth meeting and stuck to a plan to start tightening late next year to allow for a recovery in the largest Nordic economy to gain pace. Policy makers also kept a small easing bias, predicting a rate of 0.96 percent in the first half next year and then a rate of 1.25 percent in the fourth quarter of 2014.
“As expected the Riksbank left the repo rate unchanged today and, more importantly, kept a small short-term easing bias,” Nordea Bank AB said in a note today. “We had expected the Riksbank to remove the easing bias completely.”
The economy is showing signs of a recovery after the euro area emerged from a recession. Unemployment has fallen, manufacturing is picking up and consumer confidence has risen to a two-year high. Consumer borrowing has also gathered speed as the government plans more tax cuts next year.
Krona weakening has helped policy makers close in on their 2 percent inflation target and is lending a hand to struggling exporters by making their products cheaper abroad.
Still, the bank also raised its forecast for underlying inflation to 1 percent this year, and kept its forecasts for 1.4 percent and 1.9 percent in the two following years. It lowered its forecast for growth to 1.2 percent for this year and 2.7 percent next year, versus 1.5 percent and 2.8 percent earlier while also lowering its unemployment forecasts.
Sweden’s two-year yield rose one basis point to 1.30 percent as of noon local time.
“The only reasonable thing is to expect an upward adjustment of the rate path, probably already in October,” said Henrik Erikson, chief economist at Nykredit Markets in Sweden, in an e-mailed note. The lender has long argued for higher rates and maintains that view, he said.
“There’s more to do,” he said. “Short-term rates are going up, up.”
To contact the reporter on this story: Niklas Magnusson in Stockholm at firstname.lastname@example.org