Riksbank Under Pressure to Clarify Currency Intervention Remarks

Sweden’s central bank is under growing pressure to clarify its mandate after threatening to intervene in the currency market.

The bank’s legal scope to set a krona target alongside its inflation mandate is unclear, according to Swedbank economist Par Magnusson.

“How much can the Riksbank affect the floating exchange rate before it’s a shift to a new regime?” Magnusson said.

Others have raised similar questions. Haakan Frisen, head of economic forecasting at SEB, says any currency intervention "must be temporary and have direct links to the inflation forecasts." Otherwise, the Riksbank "will have created a regime that’s really not compatible with an inflation target policy.”

In a review of the bank published last week, former Bank of England Governor Mervyn King said the law should be amended to clarify that the government is ultimately responsible for Sweden’s exchange rate regime. Financial Markets Minister Per Bolund has since added his voice to the debate, saying he is open to a “discussion on how the framework should be designed.”

With consumer price growth hovering around zero for more than three years -- inflation was just 0.1 percent in December -- the Riksbank has resorted to negative rates and bond purchases to get closer to its 2 percent inflation target.

After the krona strengthened faster than anticipated in December, the Riksbank board gave Governor Stefan Ingves and First Deputy Governor Kerstin af Jochnick powers to intervene in the currency market if needed “as a complementary monetary policy measure, to safeguard the rise in inflation.”

Ingves told reporters on Monday that, while currency interventions are part of the bank’s toolbox, "the exchange-rate system is another issue, which is decided by the government.” 

To win credibility, the Riksbank should indicate some kind of target level for the krona, Magnusson said. Otherwise, the market may begin to test its resolve. “No central bank wants to repeat the Swiss problem.”

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