Krona Cries Get Louder as Riksbank Seen Delaying Tightening Plan

(Bloomberg) -- The grumbling over the weakness of the krona is getting louder in Sweden.

With the currency down at lows against the euro not seen since the financial crisis, questions are swirling ahead of the central bank’s policy meeting on Thursday. Will it give Governor Stefan Ingves and his fellow policy makers a reason to overlook that core inflation is once again falling short of predictions?

Krona Cries Get Louder as Riksbank Seen Delaying Tightening Plan

Read More: Beware of Hawkish Surprise

They probably won’t, say Sweden’s five biggest banks, which all expect the Riksbank to once again delay its plans to raise interest rate for the first time in seven years. The bank has flagged it’s prepared to raise its key rate in the second half of this year from a record low of minus 0.5 percent.

Investors and analysts say the currency’s cratering is adding to risks at this late stage of an economic cycle. Policy makers, who have consistently sought to keep the krona in check over the past years, are also sounding a bit concerned. Deputy Governor Martin Floden said on April 13 that the bank wasn’t striving for a weaker krona at this point.

The critics of the bank are arguing that the krona slide has gone too far and is making Swedes poorer by damaging their purchasing power abroad. A weaker currency also isn’t needed at a time when the economy is expanding at a rapid clip.

“The Swedish krona used to depreciate in times of crisis,” said Lars-Goran Orrevall, head of asset management at Skandia, who helps oversee 600 billion kronor ($71 billion). “Now its losing value when we’re not in a crisis. It can’t lose much more when the next downturn comes along, so that’s another thing that has already been played out that usually serves as protection.”

Read More: Riksbank Reveals Big Worries on Inflation

The bank announces its rate decision on Thursday at 9:30 a.m. None of the 25 economists surveyed by Bloomberg predict that it will change the benchmark rate.

Here’s what Sweden’s biggest banks expect it do with its rate path:

“The weak SEK is both good and bad for the bank, but not yet weak enough to change the game plan,” chief analyst Torbjorn Isaksson said in a note April 20. Expects the new path to show a slight likelihood of a rate hike in September and a repo rate of around -0.30% in December this year, which in Nordea’s view “won’t materialize in actual rate hikes.”
Riksbank will postpone the timing of the first rate increase slightly, moving in small steps as gathers more data in the coming months. The main scenario is that it will imply a hike in October rather than in September, Lina Fransson, a fixed income strategist at SEB, said in a note to clients.  
Riksbank will hold off raising rates until December 2018. It’s in no hurry because of “the recent disappointments in wage and inflation outcomes that raised new questions about the prospects of sustainably achieving the target,” Handelsbanken economists said on April 24.  
Danske Bank: The bank will shift its rate path by delaying the first hike “presumably until the first quarter of 2019.” Shifting it to just December wouldn’t it “much more leeway to assess the situation and this is why we think a further delay is more likely,” Michael Bostrom, Carl Milton and Stefan Mellin said in a note April 20. 
Riksbank will change path to signal an increase in the fourth quarter of 2018, but there are strong arguments to “either do nothing with the path or delay it until 2019.” It needs to weigh the impact of a trade-weighted krona that’s 6 percent weaker than forecast against undershooting inflation (CPIF excluding energy), analysts Knut Hallberg and Ake Gustafsson said in a note on April 20.   

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