- Some analyst see krona gains in case of U.K. ‘Leave’ win
- Riksbank may be forced to intervene to guard inflation target
The fate of the Riksbank is now in the hands of the British.
Should they vote to leave the European Union in Thursday’s referendum, Sweden’s central bank might have to do something it hasn’t done in 15 years: intervene in its currency.
With an economy booming but inflation still nowhere near its 2 percent target, the bank has repeatedly warned it may have to sell kronor in order to boost consumer prices through more expensive imports.
But following up on those threats would mean courting yet more controversy: At home, where it might be accused of overstating its mandate; and abroad, where it might be charged with fueling a currency war.
Still, it’s a scenario that may be hard to avoid.
Although the krona may weaken in the immediate aftermath of a British “Leave” victory, an appreciation “is perfectly plausible" as investors seek a haven amid post-Brexit turmoil, said Stephen Brown, European economist at Capital Economics in London.
“If that were to happen, we would expect some intervention from the Riksbank,” he said. “If the krona were to appreciate by more than, say, 3 or 4 percent against the euro, there’s a high risk they’d miss their inflation targets.”
Polls on the outcome of the vote show a close call.
Martin Enlund, a currency analyst at Nordea Bank, also sees the potential for an unwanted appreciation.
“There’s a risk that we could end up with safe haven aspects again,” he said. He sees the krona strengthening to about 9 per euro in case uncertainty leads to more easing by the European Central Bank.
Robert Bergqvist, chief economist at SEB, disagrees. He estimates the likelihood of the krona strengthening on a Brexit as "small."
But precedent suggests that’s perfectly possible. The krona jumped after the 2012 eurozone debt crisis as the Swedish economy outperformed many of its European peers, and Enlund doesn’t rule out a similar scenario after Thursday’s referendum.
A krona back at its 2012 levels would be a "very problematic development for the Riksbank,” Enlund said.
After the krona surged to 9.15 per euro on December 29, Governor Stefan Ingves issued a statement saying the bank was “highly prepared to intervene on the exchange market.” It’s already taken historic steps to boost inflation with negative rates and unprecedented government bond buying, in part to keep step with ECB stimulus measures.
That doesn’t mean a Riksbank move on the currency markets would be a straight-forward affair.
At home, Ingves might face accusations that extensive and sustained interventions aren’t within his mandate. A review co-authored by former Bank of England governor Mervyn King earlier this year highlighted ambiguities in the law when it comes to managing the krona.
The Riksbank’s "mandate is unclear, for example on things like setting a floor for the currency,” said Anna Breman, chief economist at Swedbank.
Ingves might also come under fire from abroad.
"It’s absolutely a controversial weapon," said Bergqvist. "A currency intervention means that you’re getting advantages at other countries’ expense.”