Currency Plunge in Sweden Has Government Questioning Marketsby
Selloff in the krona isn’t “really logical,” minister says
Krona hit its lowest in more than half a decade last week
The Swedish krona selloff has probably gone too far given the strength of the economy, the country’s financial markets minister said.
The currency last week reached a six-year low against the euro and the weakest against the dollar since March 2009, based on closing prices. The selloff coincided with a report that showed inflation was once again slowing, adding to speculation that the central bank will need to dig even deeper into its monetary policy toolbox.
The OECD predicts Sweden’s economy will grow almost twice as much next year as its 35 member countries, on average. Swedish GDP bounded ahead at an annual 3.4 percent in the second quarter, trouncing most economists’ estimates. Gauges of consumer and business confidence also both exceeded market expectations in September.
“In some ways it’s surprising, when the Swedish economy is so strong,” Per Bolund, the minister, said in an interview in Stockholm. “So it’s not really logical.”
As Sweden’s government questions the logic of the currency market, the central bank is showing no trace of anxiety. Riksbank Governor Stefan Ingves said last week that having a weak currency presents “no disadvantage for monetary policy.” That’s despite the currency trading lower than the bank’s own forecasts. After last week’s inflation report, the krona fell about 2.7 percent below the third-quarter forecast for the trade-weighted index that the Riksbank monitors.
Bolund isn’t alone in questioning the currency’s swoon, which accelerated after the U.K. voted to leave the European Union. Analysts are also commenting on the central bank’s apparent insouciance. Michael Grahn, an economist at Danske Bank, says that the krona’s decline is making Swedes poorer.
“It’s one thing if it lifts the pace of wage increases,” Grahn said. “But just arguing for a weaker krona, that’s something that destroys our purchasing power. The question is if this kind of benign neglect towards the krona is a successful way to conduct monetary policy.”
According to OECD purchasing power parity, the krona is still 3.5 percent overvalued against the dollar, roughly in the middle of the so-called G10 currencies. By contrast, the Canadian dollar is 5 percent undervalued, while the Norwegian krone is 17 percent overvalued.
Ingves said last week he sees “no big drama” in the dip in inflation in Sweden last month, and that “we have to live with it jumping a bit up and down.” While Ingves acknowledged that the September inflation reading deviated more than usual from the forecast, he gave no clues as to whether the bank might need to revise its estimates at next week’s meeting.
So far, currency weakness hasn’t been enough to drive inflation back to the Riksbank’s 2 percent target. The underlying inflation rate, which adjusts for mortgage costs, fell to 1.2 percent in September, while the Riksbank had expected 1.6 percent. Its latest estimates show the Riksbank assumes it will reach 2 percent in December.
Grahn at Danske Bank says the krona’s slide won’t help the Riksbank reach its target. The bank has had a negative benchmark interest rate since February last year and, according to a number of Sweden’s biggest banks, will probably need to extend its bond purchase program into the first half of next year. That announcement is expected to come next week.
But policy makers at the bank are running out of options, given the existing toolbox, according to Grahn.
“I don’t think they’ll succeed, and then they will be back to square one,” he said. “Unless they give up the inflation target, they’ll need to try and stimulate more.”
Carl Hammer, chief FX strategist at SEB, said that while further krona depreciation is the Riksbank’s only hope in bringing inflation back to target in 2017, it’s questionable to what extent the exchange rate can drive a more sustainable inflation upturn.
“Once the direct effect of the weaker currency wears off, inflation seems set to fall below target,” Hammer said in an e-mailed note. “As the exchange rate is likely to strengthen toward its long-term equilibrium level once the Riksbank stops adding to monetary expansion any short-term gains from a weak exchange rate will need to be paid back in the medium term.”