Swedish economy to accelerate strongly in 2016; Riksbank to avert rapid, strong appreciation of SEK in coming quarters

Sweden’s economic growth accelerated strongly last year. The nation’s growth was over double the growth of euro area. Capital investment, the export sector and domestic demand recorded positive growth. In particular, housing sector investment grew markedly. The positive development is likely to continue for now as the continued expansionary monetary policy will give additional support to Sweden’s economy, said Commerzbank in a research report. The Swedish economy will probably continue to expand at a similar rate it recorded in 2015.

Furthermore, there are positive signs for inflation. But it is quite soon to sound all-clear as inflation trend was positive in the past months; but it continues to be weak. On a sequential basis, consumer price index in April eased slightly.

Therefore, the Swedish central bank continues to be on alert. It kept its interest rates on hold at -0.5% in April; however, it extended its bond buying program by SEK 45 billion until the end of 2016. Riksbank had raised its inflation outlook by 0.3 percentage points to 1% for 2016. The central bank intends to keep the Swedish krona from strengthening too quickly because of the interest rate differential against the euro.

With weaker growth and inflation outlook for the euro area, the ECB has become more expansionary that risks weakening the EUR greatly, also against the SEK, noted Commerzbank. But the ECB has hinted recently that it is unlikely to further lower rates for the time being. This has kept the krona from strengthening sharply against the euro. Hence the Riksbank’s Executive Board members can be slightly more relaxed as compared to a few weeks ago, according to Commerzbank.

“We think that it will continue to manage to prevent an unwanted, quick and strong appreciation of the krona against the euro over the coming quarters”, said Commerzbank.

The EUR/SEK pair has not dropped below the 9.10 level since late 2015. Market considers Riksbank to be credible. If there is a threat that krona will strengthen rapidly and sharply against the euro, Riksbank is expected to further ease its monetary policy. The central bank has stated that it can further lower its interest rate, intervene in the FX market, or extend its bond buying program if required. The higher Sweden’s inflation data goes, the more the central bank will be able to accept a stronger SEK.

“We therefore assume that over the course of the year it will accept a gradually stronger krona against the euro”, added Commerzbank.