FX Comment – Riksbank eases to push krona lower

by: Georgette Boele

  • Riksbank surprised financial markets by easing monetary policy further
  • It cut interest rates to -0.35% from -0.25% and extended government bond purchases by 45bn
  • The krona dropped as the result
  • We expect further monetary policy easing  and a weaker krona to 9.5 versus the euro.

The Riksbank surprised financial markets by cutting interest rates to -0.35% from -0.25% and extending government bond purchases by SEK 45 bn. It stated that “inflation is rising and economic activity in Sweden is continuing to strengthen. But uncertainty has increased and it is difficult to assess the consequences of the situation in Greece. Since the repo rate decision in April, the krona has also become stronger than the Riksbank had forecasted and the development of the exchange rate remains a risk to the upturn in inflation.  Monetary policy needs to be even more expansionary in this uncertain environment to ensure that inflation that inflation continues to rise towards the target of 2%”. The Riksbank signaled it is ready to do more if necessary, even between the ordinary monetary policy meetings. It is also prepared to intervene on FX market if the upturn in inflation is threatened as a result of, for example, a very problematic developments in the markets. As a result of this decision and statement, the krona weakened.

We expect further monetary policy easing in the form of more quantitative easing, a lower repo-rate path, further rate cuts, FX interventions or a combination of these. In case the krona were to strengthen considerably, the Riksbank would see this as a threat to its inflation target. It is therefore likely that it would step up monetary policy easing in such an occasion. The Riksbank signals a preference for a weaker krona, because this would help it to reach its inflation target. We expect the krona to weaken versus the euro to 9.5.