Currency interventions don’t work.
That’s the gist of what the economist community is saying after Sweden’s central bank ratcheted up warnings that it may intentionally weaken the krona as it tries to spur inflation. Experience from the last time Sweden intervened in 2001 shows it will find it difficult to commandeer the currency, says Robert Bergqvist, a former central bank analyst who’s now chief economist at SEB AB in Stockholm.
“There are such big forces at work in the markets and it’s hard for a central bank to fight that,” Bergqvist said.
When the bank stepped in 15 years ago, the object was to strengthen the currency -- a harder task to be sure. Yet that effort was largely in vain as initial krona gains were wiped out within weeks, whipsawed by outside forces.
They intervened three times between June 15 and 25. Then the 9/11 terrorist attacks happened and signs grew that the world economy was turning south. The krona ended up 7 percent weaker against the euro than before the interventions.
This time, policy makers have one thing working in their favor: it’s easier to weaken a currency than to strengthen it. But the Riksbank is fighting against market views that the krona should be valued at a level stronger than policy makers want, making their goal that much harder to achieve.
The bank is trying to drive down the krona to boost inflation to its 2 percent target, from the current level of 0.1 percent. The Riksbank has already unleashed record monetary stimulus, including cutting rates to minus 0.35 percent -- and it’s still not enough.