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Runaway krona must be ‘reined in’: experts

The Swedish krona is 25 percent overvalued against the US dollar, according to the OECD, jeopardizing the currency's appeal as a “safe haven” for investors.

Published: 21 February 2012 15:41 CET

Runaway krona must be 'reined in': experts

The krona, as well as the Norwegian krone, are more overvalued than they’ve been at any point in the last 40 years, the Bloomberg news agency reports.

“Those currencies need to depreciate,” Peter Von Maydell, head of foreign-exchange strategy at Credit Suisse Securities in London, told Bloomberg.

Last week, the Riksbank cut Sweden’s benchmark interest rate, the repo rate, by 0.25 percent to 1.50 percent, amid concerns about weak exports.

The bank’s acknowledgment that the rising krona may have hurt Swedish exports marks a reversal from late 2010, when Riksbank governor Stefan Ingves had rejected calls to manage the rising krona as spooked investors sought safety with the Swedish currency due to uncertainty about the future of the euro.

“We have a uniquely strong economic development in Sweden,” Ingves said in late 2010.

But the Riksbank has now cut rates at two consecutive meetings, and made several downward adjustments to its forecast for future interest rate levels.

Among the reasons cited for the Riksbank’s February 16th rate cute was “sluggish growth in the euro area” which had depressed demand for Swedish exports.

According to Bjoern-Roger Wilhelmsen, chief interest-rate and currency strategist at Swedbank in Oslo, “there are limits” to how much the Swedish krona can appreciate before the Riksbank would be forced to enact monetary policy responses to keep the currency’s value in check.

As the Swedish krona is one of the least traded currencies, it is more sensitive to sudden swings, meaning that a depreciation could quickly become more severe should institutional investors decide to dump krona-denominated holdings.

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Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview.

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken.

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.”

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.”

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said.

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.

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