Swedish Riksbank Urged Not to Devalue Krona by Key Pension Fundby
CEO of Sweden's AP7 fund used to work at Riksbank in 1990s
Devaluation `not the best tool' for Sweden long-term, CEO says
Sweden’s Riksbank should avoid the temptation to devalue the krona if it is to act in the long-term interest of the economy, according to the head of AP7, one of the country’s main pension funds.
Richard Grottheim, the chief executive officer of AP7, says policy steps designed to weaken the krona risk dragging Sweden into a global currency war that not everyone can win. AP7 manages more than 270 billion kronor ($34 billion) in its equities and fixed-income funds.
“Everyone wants a currency that’s as weak as possible,” Grottheim, who was head of the Riksbank’s monetary policy department in the 1990s, said in an interview in Stockholm on Tuesday. “It effects exports and the economy. But not everyone can devalue themselves out of this problem and, in the long term, it’s not the best tool.”
The Riksbank has resorted to negative interest rates and quantitative easing in an effort to revive inflation in the largest Nordic economy. Policy makers have repeatedly said that direct currency interventions are a measure that can also be used should the need arise.
The krona is the best performer, besides the yen, of the 10 currencies tracked in the Bloomberg Correlation Weighted Indexes over the past year. Its continued strength has hampered the Riksbank’s efforts to reach its 2 percent inflation target, with consumer prices failing to grow at that pace for about half a decade.
Riksbank Governor Stefan Ingves has signaled that policy makers may need to tolerate a slightly stronger krona, given the international context of extreme stimulus from the world’s major central banks.
“It is no longer possible to expect a weaker exchange rate to contribute to higher inflation” and “there are evident risks that the krona will strengthen,” Ingves said, according to minutes of the bank’s April meeting published on Wednesday. “A key question for Swedish monetary policy is therefore whether domestic demand will actually continue to function as a driving force behind inflation.”
But Ingves also underscored the Riksbank’s willingness to resort to direct exchange-rate measures, should the need arise. Besides the options of further rates cuts and more quantitative easing, “it is also worth repeating that the Riksbank is prepared to intervene on the foreign exchange market at short notice if the development of the krona threatens the upturn in inflation,” he said.
The Riksbank’s trade-weighted krona index, KIX, on Wednesday weakened to 108.4, in line with the Riksbank’s forecast for the second quarter. The bank announced in December it was ready to intervene in the currency market after the krona had strengthened more than forecast.