Swedes Concerned By Elusive Inflation

sweedish-economy

In a sign that policymakers are growing wary of Sweden’s ability to reach the 2.00% inflation target, the Riksbank has decided to expand its ongoing quantitative easing measures by adding purchases during the first half of 2017. The prospect of the Krona gaining ground versus the Euro amid the European Central Bank’s own extension of its asset purchase program has been enough to warrant an admission from Riksbank officials that further accommodation could be possible. Any strength in the local currency could harm efforts to reach the target as import costs fall amid a rising Krona.

While the immediate reaction to the development was strength in the Krona versus other major global currencies, the decision underscores the idea that fears of disinflation and deflation remain serious. In the case of Sweden, even the implementation of a negative interest rate environment has not been enough to reach inflation goals. Despite positive momentum in the arenas of employment and growth, it has become abundantly apparent that the yardstick by which the Central Bank measures success is growth in consumer prices during an especially challenging chapter for monetary policy.

Krona Strength Keeps a Lid on Inflation

After managing to kill off a bout of deflation through a combination of extremely loose monetary policy and asset purchases, the gains in inflation are proving insufficient to persuade policymakers that tightening may be around the corner. In its latest decision, the Swedish Riksbank has determined that the only way to reach the inflation target in Sweden is by adding SEK 30 billion in purchases while leaving open the option of dropping rates even further. According to a statement from the Executive Board, there is “still a high level of preparedness to make monetary policy more expansionary if the upward trend in inflation were to be threatened.”

One of the predominant causes behind policymakers’ palpable concerns is the recent strengthening of the Krona versus the Euro. Although the US dollar exchange rate is also important, it does not carry the same weight as the EURSEK rate. With the ECB expanding the money base and pressuring the EURSEK pair lower, it raises the threat of undoing some of the most recent consumer price gains. At present, Swedish CPI stands at 1.40% on an annualized basis as of November, climbing from the 1.20% reported in October. As a result, the decision to expand asset purchases through the first half of 2017 indicates that the USDSEK has further room to run to the upside as Central Bank officials use all the tools available to hit the inflation target.

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