Sweden’s currency plight fans more stimulus to come

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The strengthening krona may force Sweden’s central bank to add stimulus again as criticism mounts that its unprecedented policy moves are threatening stability in the largest Nordic economy.
While all 20 analysts surveyed by Bloomberg predict that the main rate will be kept unchanged at a record low of minus 0.5 percent, the Riksbank may extend its government bond buying programme. Three of Sweden’s five biggest banks forecast an expansion, while two anticipate it will allow its current program to end in June.
Policy makers in Stockholm face difficult decisions as any signal they are paring stimulus could strengthen the krona and once again pare inflation amid growing concerns the economy may be overheating. As a small economy on Europe’s periphery, they are also hamstrung by the European Central Bank’s push ahead with further record stimulus.
“You can easily put together a long list of reasons why the Riksbank won’t do more but central banks around the world are very important to the Riksbank and the krona is a source of worry,” said Torbjoern Isaksson, chief economist at Nordea Bank. “If the Riksbank doesn’t do anything the krona can strengthen quickly and I think they know that.”
On a trade-weighted basis, the currency is now back at the level which prompted the central bank in December to threaten to intervene.
Nordea predicts QE will be
extended into the second half of the year by 65 billion kronor ($8 billion) – the same amount as in the first six months of the year. When the current QE expires in June, the central bank will have bought about 200 billion kronor in bonds, or about a third of nominal government debt.
Still, at least three members on the bank’s six-member board have said they are reluctant to add more stimulus as inflation has beat forecasts over the past three months. Underlying price growth climbed to 1.5 percent in March, closing in on the 2 percent target. The economy grew 4.5 percent in the fourth quarter.
The faster-than-expected inflation and dovish comments this month by Deputy Governor Cecilia Skingsley, mean Swedbank now expects the bank to add 30 billion kronor to 40 billion kronor in purchases, less than it had anticipated earlier.
“If you had asked me a week ago, our call was that they would continue with QE at the same pace as in the first half, but we’ve now revised down our expectations,” said Knut Hallberg, an analyst at Swedbank in Stockholm.

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