Krona Falls as Sweden Sinks Back Into Deflationary Quagmire

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Sweden’s krona sank after a report showed consumer prices declined when most economists predicted an increase, prompting speculation the Riksbank may cut its main interest rate further below zero.

The krona dropped as much as 0.8 percent against the euro and traded 0.7 percent lower at 9.3189 as of 10:43 a.m. in Stockholm. Headline consumer prices dropped 0.2 percent from a year earlier in April, the statistics office said on Tuesday. That was well below the median estimate in a Bloomberg survey of 10 economists, which had pointed to a 0.2 percent price increase.

The inflation report delivered another “downward surprise,” Colin Bermingham, an economist at BNP Paribas in London, said in a note. “The Riksbank will not welcome today’s numbers, particularly in terms of core inflation, given their extremely high sensitivity at present to an inflation undershoot.”

The Riksbank has cut its main rate to minus 0.25 percent and started purchasing bonds in its battle against deflation. But the bank’s clout has in part been undermined by the European Central Bank’s much bigger stimulus package, which Riksbank Deputy Governor Henry Ohlsson has warned threatens to drive the krona higher and keep a lid on import prices.

Housing Bubble

The bank has struggled to balance its concern that low rates risk fueling an overheated housing market with policies that address disinflationary pressures. Sweden suffered recurrent bouts of deflation last year, with annual consumer prices dropping every month from August through January.

Several Riksbank board members referred to the need for continued expansionary monetary policy, according to the minutes of last month’s rate meeting, which were published at the same time as the inflation report.

“The minutes, together with the large downside surprise for CPI also released today, supports our view that the Riksbank will deliver another rate cut in July,” Olle Holmgren, an analyst at SEB AB in Stockholm, wrote in a note.

“There is of course also a heightened probability for an inter-meeting rate cut,” he said. “But in our view it is not the main scenario as inter-meeting cuts are likely primarily designed to counteract adverse financial market movements such as a rapid strengthening of the krona.”

Consumer prices were unchanged on the month in April, when the Bloomberg survey of economists pointed to a 0.4 percent increase. Underlying prices, which take mortgage costs into account, rose 0.7 percent on the year, lagging behind an estimated 1 percent.

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