Twice Bitten, the Riksbank Should Think Hard About TighteningBy
While Swedish policy makers have said they will have no problem tightening ahead of the European Central Bank, history suggests that doing so could backfire.
The Riksbank has this century raised interest rates faster than its counterparts in Frankfurt and Washington twice. Both times ended in a retreat, with the Swedish bank battling to contain a strengthening currency and a slowdown in inflation, according to Danske Bank A/S analyst Marcus Soderberg.
During a brief period in 2002 the Riksbank raised rates even as the Fed and the ECB were on hold. This sparked a krona rally. The same pattern was repeated in 2010-11, triggering a prolonged effort to keep inflation up as a stronger krona pushed down import prices and damped exports.
At the end of the easing cycles that followed, the Riksbank’s benchmark was lower than both the Fed’s and the ECB’s main policy rates.
Deviating from the ECB or Federal Reserve could therefore be followed by a stronger krona and a substantial drop in inflation, just shortly after the central bank managed to re-anchor price growth around the 2 percent target, according to Danske Bank.