The post-split settlement of the central bank may have helped send the Swedish krona to its weakest level on record.
The Swedish currency was trading on Tuesday at 11.80 Norwegian krone for one euro. Never before in Sweden’s history has the exchange rate been so weak.
Like the Norwegian krone, it’s hard to say why it’s weak, but Kjersti Haugland, chief economist at DNB Markets, has a theory.
– A shift in market prices, with the potential for higher and longer rate hikes in the outside world, is the likely cause, Hoagland wrote in DNB Markets’ morning report.
When Riksbank decided to raise the interest rate at the end of April, it did so with an increase of 0.5 percentage points. The “normal” thing is for central banks to raise interest rates by 0.25 percentage point.
The rate hike wasn’t exciting, but what surprised economists was the rate path, according to Hoagland.
He thinks the Bank of Norway has a krone problem: – Huge workforce
– an obvious surprise
More specifically, the interest rate trajectory showed that the interest rate could rise another quarter of a percentage point, either in June or September. It was a clear surprise to both analysts and market players, who expected the interest rate to rise by at least another quarter of a percentage point, Hoagland wrote.
Owning currencies in countries with higher interest rates is more attractive to market participants. In Sweden, the main interest rate is 3.5 percent. Norway has a prime interest rate of 3.25 percent. In comparison, the main interest rate is 3.5 percent in the eurozone, and ranges from 5-5.25 in the United States.
If the ECB raises interest rates faster than the Riksbank, there could be less gain from owning the Swedish krona than the euro. The interest rate differential is increasing. It is highlighted as one of the main explanations for the weakening of the krone in Norway and Sweden.
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The Bank of Norway faces strong opposition. The interest rate should go up more.
The Riksbank’s interest rate decision was not unanimous. Two of the six interest rate committee members, Anna Breimann and Martin Flodden, disagreed with the decision to raise interest rates by 0.5 percentage points, and wanted 0.25.
– Hoagland writes that the Riksbank’s decision in April appeared to be a compromise after a split in the committee.
The Riksbank wrote in a press release after the interest rate decision in April that the krone was not a decisive factor behind the price hike, but it did contribute somewhat to the rise in inflation. Central banks raise interest rates to reduce inflation.
In two weeks, the Riksbank will make a new interest rate decision. The big question then is whether or not the Riksbank will raise the interest rate.
– Then the question is whether the devaluation of the krone pressured the committee to change course in a more militant direction again, writes the chief economist.
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