The Swedish krona strengthened after the interest rate cut – E24

Robert Bergqvist, an economist at SEB, says uncertainty surrounding the Swedish economy has decreased.

At the beginning of May, the Riksbank lowered its key interest rate from 4 to 3.75 percent.

This was Sweden's first interest rate cut in eight years and ahead of Norway, the European Central Bank, the United States and the United Kingdom.

But despite the fact that higher interest rates often mean stronger exchange rates and vice versa, the Swedish krona has since made an unexpected turnaround.

Positive development

Since the Riksbank's interest rate announcement on May 8, the Swedish krona has appreciated by more than 4 percent, according to the so-called KIX index:

It is a currency index that describes the value of the Swedish krona against the currencies of 32 countries that are considered important trading partners of Sweden.

-It's commercial. This means that Sweden's important trading partners, such as Germany and Norway, are given extra weight, explains chief economist Robert Bergqvist at Skandinaviska Enskilda Banken (SEB) to E24.

– Removing uncertainty

Like Norway, Sweden has suffered from the weak value of the krone. Although an interest rate cut by the Riksbank could, in isolation, signal further weakness in the Swedish krona, the opposite has happened.

– What could be the reason behind this development?

“I think it removed the uncertainty surrounding the krone and confirmed that you can have an interest rate differential,” says Bergqvist.

He explains:

From abroad, people were concerned about the high level of debt in Swedish households and falling house prices, which could deal a severe blow to the Swedish economy. Then you can now see that housing prices are rising, and households seem to be able to adjust to slightly higher interest rates. This removed some of the risks surrounding the Swedish krona.

However, the senior economist believes that the difference in interest rates compared to other countries may be too large.

– But if you cut the interest rate once or twice before Nourish itNourish itUS central bank Federal Reserve (Fed)Maybe it won't be of great importance.

– I started talking about growth

New figures for price growth in Sweden will be published on Friday.

The Riksbank is more interested in price growth apart from changes in mortgage interest rates (KPIF) when it sets the interest rate. In April, this was lower than expected at 2.3 percent. In May, a 2.1% decline is expected, according to a Bloomberg survey.

Bergqvist believes that the positive development here may also have contributed to the positive development of the krone.

– We saw that the inflation risk in Sweden was lower than in Europe and the United States, and in Norway, for that matter. This has reduced the uncertainty surrounding Swedish monetary policy.

In addition, the conversation about the Swedish economy has changed, according to SEB economist.

– The government began to talk about the fact that inflation had fallen, and that a more aggressive fiscal policy could therefore be pursued. They are starting to talk about growth, which is positive for the krone.

– There is talk about increasing investments in Sweden in the future?

– Yes, and it is good that we can use the strong state resources that we have to make investments for the future. We need to make more investments in physical and digital infrastructure. In addition, defense investments will increase, partly due to membership in NATO, Bergqvist says.

Waiting for the next interest rate cut in August

The next interest rate meeting in Sweden is scheduled to be held on June 26. The next day, the Riksbank publishes its decision and monetary policy report.

Bergqvist points to three risk factors that the Riksbank has paid attention to regarding price growth in the country:

• Geopolitical situation
• Inflation expectations
• Krone exchange rate

– Recently, we have seen that many of these factors no longer apply, he says, noting, among other things, that the war in the Middle East has not led to significantly higher energy prices.

The SEB economist believes that another rate cut in June would be too early, but he expects a key rate cut at the meeting in August.

– Most people would probably agree that this is the right time. If inflation is normal, we should also have a normal interest rate.

This percentage ranges between 2 and 2.5 percent in Sweden, according to Bergqvist.

– Therefore, the Riksbank does not need to worry about lowering the interest rate further. He says that as long as it is above this interval, it will be at a tightening level.