Sweden's Currency Selloff May Be About to Save the Central Bank

(Bloomberg) -- As Sweden’s krona plunges to its lowest point since the financial crisis, the central bank may finally get the economic setting it needs to start raising interest rates.

Riksbank Governor Stefan Ingves and his colleagues will be watching the exchange rate closely when they meet this week to discuss monetary policy in the biggest Nordic economy. Their announcement is due on Sept. 6, just three days before a national election that could upend the status quo in Swedish politics. All 24 analysts surveyed by Bloomberg expect the bank to keep the main rate at minus 0.5 percent, but the weak currency is likely to shape any forward-looking comments.

“The krona is so weak today that it’s absolutely a parameter that will be weighed in,” said Annika Winsth, chief economist at Nordea AB, the biggest Nordic bank. For now, “underlying inflation is so weak,” that there won’t be a rate increase this week, she said.

The Riksbank will discuss the future of monetary policy as Sweden girds for what is set to be one of the most consequential elections in its history. The nationalist Sweden Democrats -- a party that wants the country to leave the European Union -- is poised to win almost 20 percent of the vote. The party’s ascent has made it more difficult for the two main political blocs to form a viable government, and the uncertainty surrounding the election outcome is a key reason for the selloff in Sweden’s currency.

A weaker exchange rate raises the price of imports and drives up inflation. It also feeds Swedish economic growth by making exports cheaper.

But according to Winsth, “the Riksbank is probably worried about the weak krona.” She says that “when the election is over next week, some of the krona weakness we are currently seeing could quickly disappear and weak service inflation and weak underlying inflation may become more in focus again.”

Sweden's Currency Selloff May Be About to Save the Central Bank

Recent data show that the Riksbank’s long struggle to revive inflation is far from over. While headline price growth has been close to the 2 percent target for more than a year, inflation excluding energy has slowed to a 17-month low. Price growth on services, something closely watched by policy makers, is at its lowest since 2015.

The Riksbank’s board was split at its most recent meeting, with two members arguing for a rate hike right away, or in September, while the other four wanted to wait until next month or December.

First Deputy Governor Kerstin af Jochnick -- who has consistently been one of the most dovish board members together with Deputy Governor Per Jansson -- said last month that it was “very good” that headline inflation is now more than 2 percent and that the weak krona is likely to have an impact further ahead. But she also said she wants to see more evidence that inflation gains are being felt across the broader economy.

“We want inflation to stabilize around 2 percent, and we can see that inflation pressure has been moderate for some time,” af Jochnick said after a speech. “In July I mentioned service prices because they have turned downwards, and it’s been in our forecast that they should remain at the levels that they touched earlier.”

Here’s what Sweden’s biggest banks say about the rate path:

The Riksbank is “likely” to leave the rate path unchanged, but the “risk is that the path could be adjusted slightly lower,” according to Swedbank analysts Ake Gustafsson, Jorgen Kennemar and Knut Hallberg. Swedbank predicts the Riksbank will raise the rate by 10 basis points in December.
Danske Bank:
The Riksbank will push back the first rate hike by at least one quarter to indicate a tightening in the first quarter of 2019, according to Michael Grahn, chief economist at Danske Bank. A majority on the board seems to be pointing in that direction, he says. 
The Riksbank will probably lower the rate path so that it indicates "a trivial probability" of a quarter-point increase in October and a “decent probability" of one in December, said Nordea chief analyst Torbjorn Isaksson.
The rate path will be lowered by about 10 basis points, but the bank will continue to signal a rate increase this year as the main scenario, according to economist Olle Holmgren.
The Riksbank will lower the rate path slightly to show a reduced likelihood of an October hike, but keep its signal for a December rate increase unchanged, strategist Claes Mahlen said. 

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