Sweden’s krona has reached an unsustainably low level that will force the country’s central bank to confront a realisation that is dawning on others about the limitations of monetary easing, analysts are predicting.
The krona, which on Wednesday edged up from a 12-month low against the euro, is the weakest performer among G10 currencies this year other than sterling. It has declined by 4.7 per cent against the euro and by 1.6 per cent versus the dollar.
The Riksbank, Sweden’s central bank, has long sought a competitive krona to support its export-driven economy and meet its inflation target of 2 per cent. That has sent interest rates into negative territory to help achieve those goals.
Sweden is enjoying strong growth levels, with gross domestic product hitting 3.4 per cent in the second quarter. Inflation began moving up in November, having been stuck at around the zero mark for three years, and has now nudged up to 1.1 per cent.
However, Stefan Ingves, the Riksbank governor told parliament on Tuesday he remained determined to ease policy further to combat low inflation. But the danger for Sweden, one that Norway shares, is the impact of low interest rates on household debt, which are among the highest in Europe.
Foreign exchange strategists are warning that the weaker krona policy, which has seen the currency depreciate by 15 per cent in the past four years, may be reaching its limit.
Thu Lan Nguyen at Commerzbank pointed out that the European Central Bank and the Bank of Japan, far from weakening their currencies this year with further monetary easing, had seen their currencies strengthen.
“Against this background the krona’s weakness does not seem sustainable,” she said.
Either inflation continues to rise, bringing with it an end to ultra-expansionary monetary policy and a rise in the krona, said Ms Nguyen, or inflation stays where it is and the Riksbank comes under pressure to act. The central bank may then end up with a policy that reaches “the limits of its possibilities”.
The Riksbank’s willingness to cut rates further contrasts with Norway’s decision last week to change tack. Norges Bank went back on previous guidance on future rate cuts by announcing that rates would remain unchanged, thanks to a positive growth outlook.
The upshot was that the Norwegian krone, or “nokkie”, which had fallen 16 per cent in the 18 months to mid-2016, was this week trading at its highest level against the euro in a year.
Underscoring the conundrum for currencies from such a monetary policy shift, Norges Bank governor Oystein Olsen on Wednesday said the central bank’s goal remains to be a weaker nokkie.
Neil Mellor, forex strategist at BNY Mellon, said Mr Ingves had little choice but to prepare to ease policy further to keep the krona lower, and would have noted the impact on the nokkie following what he called Norges Bank’s “brave decision to call time on the easing cycle”.
He added: “If the growth of household debt is to be tamed in Sweden without the side effects of untoward currency appreciation then the greater use of quantitative restraints appear inevitable. But this is far from an ideal situation for any country, not least given the unimpressive record of these measures in the past.”
According to Robert Bergqvist, chief economist at SEB, Sweden’s negative interest rates are proving counterproductive, raising unnecessary doubts among corporates about the obvious strength in the economy, and driving a savings ratio of about 15 per cent of disposable incomes.
The Riksbank wants a weaker currency to create short term inflation, said Mr Bergqvist.
“I hope they conclude it’s impossible to keep currency low for a very long time. It’s not good for your economy and at some point you must allow your currency to appreciate,” he said.