Swedish Krona: Inflation risks may prompt tougher Riksbank stance - BNY

BNY’s Geoff Yu says rising Swedish import prices and continued weakness in the krona are adding to inflation risks. He expects the Riksbank to adopt firmer language on SEK valuations and sees scope for the market to bring forward expectations for the next rate hike.

Inflation risks support earlier Riksbank tightening

"We remain perplexed by the market’s reaction to the August Riksbank decision. Price action suggests the policy board's decision was dovish, but Governor Erik Thedéen made it clear that the next step remains a hike. The notion that the decision was not “clear cut” does indeed cut both ways, and we assign an equal risk that current tightening in the repo rate forecast could be moved forward, as “clear upward momentum” exists in inflation."

"There is a risk that headline inflation in Sweden will catch up swiftly, compounding the risks from core inflation. Throughout the conflict, regulated prices have helped limit transmission from external inputs, leaving Sweden with some of the lowest headline inflation rates in Europe. However, import prices are clearly starting to catch up, and some pass-through is inevitable."

"EUR/SEK price action has not helped, but it is particularly worrying that the KIX import price index – which the Riksbank tracks – has already jumped well ahead of the exchange rate. In the past, alternating dollar and euro strength helped even out price action, but the current jump suggests SEK is being treated as a funding currency, which requires a strong offset."

"The Riksbank has been forceful on SEK valuations in the past. It is one of the few central banks in the G10 that openly seeks a stronger exchange rate to help achieve its inflation objectives. With the KIX repeatedly missing projections and adding to inflation risk, we expect more forceful language up ahead at a minimum, which in time can lead to policy surprises."

"Presently, a full hike is not expected until next year; risk reward favors moving the timeline forward."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)