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Krona hits 5-month high after inflation beat

The Swedish krona hit its strongest level since March on Tuesday morning, after the country’s latest inflation data came in ahead of all but the most hawkish estimates.

Underlying inflation rose to 2.4 per cent in July, the first time it has risen above the Riksbank’s two per cent target since 2010. Only one of the nine economists surveyed by Bloomberg predicted such a strong reading, and the central bank’s own forecasters (who don’t have the best record) had predicted an increase of only 1.8 per cent.

Inflation was driven up by the higher cost of package holidays and electricity prices.

The stokkie was up 0.72 per at publication time to SKr9.4887 per euro, as the strong data raised hopes the Riksbank could accelerate its plans to lift interest rates from their record low of -0.5 per cent. The central bank has previously been cautious about raising rates despite Sweden’s booming economy, as it had struggled to lift inflation until the last few months.

However, last month’s better than expected inflation data triggered a similar short-term jump in the krona which was not sustained, and ING’s Petr Krpata warned that today’s currency boost may not signal the start of a longer rally:

We expect the boost to SEK from a strong CPI release to be one-off (ie, lasting today or this week), as we expect the Riksbank to continue erring on the side of caution and not meaningfully changing its neutral policy stance for now. This is because:

  • The central bank’s concern about an overly strong SEK hampering CPI outlook (indeed, should the Riksbank suddenly start normalising policy, SEK would likely rally meaningfully); (b)
  • The Riksbank’s likely preference to wait for the ECB announcement on the form of QE tapering.