Riksbank increases rate, seeks to shore up krona

Bloomberg

The Riksbank raised borrowing costs by half a percentage point, pledged to start bond sales and declared it wants a stronger krona, as its new governor set out his inflation
fighting credentials.
The krona jumped after the decision on Thursday to lift the Swedish central bank’s interest rate to 3% and accelerate the unwind of quantitative easing, in the first evidence of Erik Thedeen’s monetary stance since he took office. While most economists surveyed by Bloomberg anticipated the 50-basis-point increase, other elements of the decision took some by surprise.
“Quite a U-turn! From saying the krona is not important and selling the krona last year to saying the krona is important and selling bonds,” said Stefan Mellin, an analyst at Danske Bank A/S. “There’s a new kid in town.”
The comments on the krona marked a departure from previous communication for the Riksbank, which has been criticized for being too sanguine on the currency’s weakening.
The Swedish krona jumped as much as 0.9% to 11.2445 against the euro after the announcement, its highest level in nearly two weeks.
The rate increase and a signal of more to come follows a similar hike by the European Central Bank, which is also about to start unwinding its bond holdings. The decision chimes with renewed vigor among global monetary officials to tackle an inflation scare whose persistence investors had begun to doubt.
Sweden’s heightened policy urgency risks inflicting a toll on the economy at a time when its housing market is crashing and a recession may already be gripping the Nordic region’s largest country.
However uncomfortable that may be, Riksbank officials are acting to tame inflation that is in double digits for the first time in more than three decades. Threatening further price pressures from abroad, the krona dropped to its lowest against the euro since 2009, in the wake of the ECB’s hiking.
“If the krona continues to be weak, it will be considerably more difficult for the Riksbank to sustainably return inflation to the target,” officials said. “A stronger krona would be desirable.”
New projections from the central bank indicate that the rate will peak higher than previously seen, with at least another quarter-point increase foreseen. Officials reckon that will bring price growth to its 2% target by year-end.
“Inflation is far too high and has continued to rise,” the Riksbank said. “The policy rate will probably be raised further during the spring.”
The Riksbank now expects the Swedish economy to shrink by 1.1%, less than the 1.2% previous prediction. The forecasts underscore the threat they see to the economy in a year when it might be on track to suffer the worst contraction in the OECD.
The central bank will in April begin to cut its asset holdings at a faster pace, selling 3.5 billion kronor ($340 million) a month in government bonds but holding on to other debt assets. Debt sales, as well as an increase in the Riksbank’s offering of certificates, should facilitate foreign investment in Swedish assets and could contribute to a stronger krona, the bank said.
Thedeen is the former chief financial regulator in Sweden, and took office on Jan. 1, joining new Deputy Governor Aino Bunge, who started in December. Governor Stefan Ingves stepped down in December, and this decision was the first since 2005 without him in charge.
“The bank is determined to bring down inflation, and keeping the krona in check is an important part of that strategy, at the cost of a marked downturn in the economy” Nordea Bank Abp chief analyst Torbjorn Isaksson said in a note. “Obviously, the Riksbank has taken into account the hawkish message from the ECB and the Fed.”