Photographer: Linus Hook/Bloomberg

Easing Addiction Risks Turning Swedish Krona into ‘Play Money’

Weak currency seen sending ‘wrong signals’ about the economy
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As the Brits worry about the ramifications of a weakening pound, Sweden’s central bank has happily driven down its currency to the lowest level in more than half a decade.

Defying fundamentals – strong economic growth, a big current account and trade surplus and rising employment – the Swedish krona was the second-worst performing currency in the world last month after the British pound.

To read Bloomberg Gadfly’s take on the weak krona, click here.  

Investor flight from the krona intensified last week, after the central bank warned that in order to get inflation back on target it stands ready to lower its benchmark rate even deeper below zero and pump even more cash into the economy by expanding its bond purchasing program. The bank’s main rate is already at a mind-bending minus 0.5 percent.

While the central bank may be pleased – all else being equal the weaker currency will push up the cost of imports and generate inflation – economists and the government are increasingly concerned about the side-effects.

“The Riksbank has gone too far,” said Torbjorn Isaksson, an economist at Sweden’s largest bank, Nordea AB. “Every time the krona ticks weaker all Swedes become poorer.” 

Nordea expects its entreaties to fall on deaf ears. It predicts the central bank will add even more stimulus in December to keep the krona weak. Isaksson, however, adds that the Riksbank will want to be careful about adding even more easing after that in order to avoid turning the currency into “play money.”   

The almost uncontrolled swoon is also damaging the nation’s reputation, according to Robert Bergqvist, chief economist at SEB AB.

“We’re getting a lot of questions from customers in other countries about why the krona is this weak,” he said. “When investors see the exchange rate losing value it sends out a signal that maybe something is not quite right with the Swedish economy.”

 

While a depreciating currency may help exporters, it could also cause long term damage, for example by reducing the pressure to undergo structural transformation and improve competitiveness, he said.

“There may be a rude awakening once the krona strengthens and what’s now an advantage turns into a disadvantage,” Bergqvist said. He’s optimistic that betting on a rising krona will be one of the best recommendations for 2017.

But for that to happen, the Riksbank needs to “let go of the krona a bit,” he said.

And when that will happen is anyone’s guess. An exit is more difficult the deeper the currency goes, according to Isaksson. That’s because the weaker the krona becomes, the greater the future deflationary impulse will be when it eventually strengthens again.

And then policy makers will find themselves back where they started.

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