Swedish krona hits the skids

Sweden’s currency, the krona, has fallen sharply, hitting a three-and-a-half-year low against the euro and a two-year low against the US dollar. The latest slip was caused by an unexpected cut in interest rates by the Riksbank, Sweden’s central bank.

It reduced its main rate by 0.5% to 0.25%, the first cut since December. The Riksbank also lowered its growth forecasts and said it didn’t expect to raise rates until the end of 2015, having previously pencilled in a rise next spring.

What the commentators said

The bank is worried about deflation, noted Alen Mattich on WSJ.com. The annual rate of consumer-price inflation has been mildly negative for much of this year.

While the krona has weakened by 5% on a trade-weighted basis, which should help by pushing import prices up, “the Riksbank isn’t taking any chances”: the euro could well fall as monetary policy in the single currency bloc is loosened, implying a higher krona. So this move is also designed to pre-empt a weaker euro.

The European Central Bank’s desperate measures to fight off deflation threaten to make life tougher for the eurozone’s smaller neighbours, said Geoffrey Yu of UBS. “They all fear that deflation will be aggressively exported to their countries.” Norway is in a similar predicament.

It may not be too long, reckoned Yu, before Sweden and Norway adopt a Swiss-style currency target: countering deflation by buying euros to keep their currencies below a predetermined level.

But the Riksbank is walking a monetary tightrope, said Charles Duxbury in The Wall Street Journal. It’s been reluctant to cut rates because it doesn’t want to fuel an already overheated housing market.

Household debt has hit 170% of disposable income in recent years, and house prices resumed their climb from overvalued levels after the financial crisis. The Riksbank knows exactly how damaging a burst bubble can be. After all, it “had to deal with the consequences of a banking crisis during the 1990s”.

Merryn

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