In accordance with mainstream expectations, the Riksbank raised interest rates at its most recent policy meeting by an additional 50 basis points, to 3.00%.
The prediction for the highest interest rate has gone up from 2.85% to 3.33%.
The exchange rate of the euro to the krona (EUR/SEK) plunged precipitously to 2-week lows of 11.16 from 11.33, and the krona retreated even more from 13-year lows.
The exchange rate of the pound to the krona (GBP/SEK) also dropped to 2-week lows around 12.60 from about 12.80.
Increasing Inflation Concerns
With the core rate at 10.5% (up from 9.5% for December) and the headline rate at 12.3% (up from 11.5%), it was the highest rate in over 30 years.
The bank acknowledged the expenses associated with increased loan rates, but said that, “if inflation were to persist at the current high levels, it would be far more costly for consumers and the Swedish economy in general. The Riksbank is lowering the likelihood that the high inflation will last for a longer time and that even more tightening will be required in the future by tightening monetary policy further now.
Now, the bank desires a stronger krona
It said, “Moreover, the Riksbank will find it much harder to stably bring inflation back to the goal if the krona remains weak.
Overall, the Riksbank’s message today was considerably more hawkish than we had anticipated because the rate path was elevated more than anticipated, according to Nordea.
The risk of instability is acknowledged by ING, which states that “the result of pay talks might see the jobs market working against a deflationary trend.
Important Risks to the Economy
The Riksbank revised its GDP projection upward by 0.1% point to -0.9 for 2023 and kept its 2024 estimate at 1.0%.
“The GDP indicator from Sweden signaled that it was probably one of the poorest performing European economies at the end of last year, shrinking by -0.6% in Q4”, said MUFG in response to concerns about the economy.
The aim for a stronger currency was one of the hawkish aspects of the decision, according to Simon Harvey, head of FX analysis at Monex Europe.
But he continued, “All this is extremely bullish for SEK, and if it’s met by a suitably hawkish ECB, it’s unlikely to alter the tide too much.”