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SEB criticises Riksbank dovishness as krona hits 5-month high

Sweden’s krona touched a fresh five-month high on Thursday as traders bet that the central bank will be unable to maintain its commitment to keeping record-low interest rates, with local bank SEB warning that the Riksbank’s current attitude “increases the risk of a new crisis”.

As several major central banks have gradually shifted their tones and signalled a coming normalisation after years of monetary stimulus in recent months, Sweden’s Riksbank has been notably reluctant to follow suit.

The world’s oldest central bank finally accepted in July that it is unlikely to cut interest rates even further into negative territory, but has continued to warn markets not to “pre-empt future rate increases“, even though Sweden notched up economic expansion of 1.7 per cent in the second quarter alone.

But the challenge is clear: the krona has managed to hold on to the gains it made after the latest stronger-than-expected inflation data were released last month. The currency hit a high of SKr9.4578 per euro on Thursday, its strongest level since mid-March, and at publication time was up 0.24 per cent for the day at SKr9.4604.

In an article in Swedish financial newspaper Dagens Industri on Thursday, SEB’s Robert Bergqvist and Håkan Frisén highlighted why investors are growing increasingly sceptical that the Riksbank will be able to maintain its dovishness much longer.

The central bank itself has repeatedly warned that its low rates are creating imbalances in the wider economy, with Sweden suffering from a severe housing shortage and household debt climbing rapidly.

Even the European Central Bank has shown a willingness to consider the health of the wider economy to take action in the face of weak inflation, but the Riksbank’s rate-setters have remained, in the words of one Nordea analyst, “inflation target nutters“, insisting that their only job is to focus on prices.

Political intervention is tricky with a crisis-wracked minority government, and SEB warned that “we have come to a situation where different policy actors isolate themselves from each other with mutual allegations of passivity”.

The bank says “an independent monetary policy is not the same as an isolated monetary policy”, concluding:

There are reasons for expansionary monetary policy in Sweden and globally, but given the strong growth and growing imbalances in the Swedish housing market, it is not reasonable to have a more extreme policy in Sweden than in the rest of the world.