Despite the extreme monetary policy measures undertaken by the Swedish Riksbank over the last few years in an effort to insulate the economy and prevent deflation, the Krona continues to appreciate modestly versus the US dollar, causing anxiety among policymakers. As the economy continues to recover after several years of negative shocks, newfound strength in the Krona could derail progress on growth and inflation, two areas of critical importance for Central Bank officials.While the prospect of higher interest rates in the US might be enough to dissipate recent weakness in the USDSEK pair, forward-looking uncertainty and slowing economic activity might force further accommodation or an intervention from the Swedes as they work to fend off Krona appreciation.
Fortune Reversal
After gross domestic product expansion printed at the highest rate in five years back in the fourth quarter of 2015, first quarter growth momentum has tapered to 0.50%, marking the slowest pace in six quarters.While negative interest rates have helped to keep inflation in positive territory, with the latest headline consumer price figure recorded at 0.60%, it has penalized savers and created risks in the housing sector.Construction is one of the key drivers of recent blockbuster growth which has placed Sweden it among the most competitive economies in Europe according to recent findings.However, while the refugee influx has kept construction companies operating at full capacity, the country now faces a labor shortage and there are concerns that the economic boost from immigration will only be temporary as the government is forced to spend significant amounts to integrate the newcomers.
Even though economic activity remains strong, a huge component of this uptick in activity and inflation has to do with the substantial stimulus measures and quantitative easing program implemented by the Central Bank. After flirting with deflation after consumer prices printed in negative territory for several years straight, the unconventional measures have helped headline prices climb back into positive territory.The price has not been small though, with the Riksbank already spending SEK 200 billion to acquire government bonds with an additional SEK 45 billion planned for the second half of the year.One question that remains is how the economy will react once stimulus measures are removed and if the economy will continue to perform at current levels.So far the moves have kept a lid on Krona strength and helped lift inflation, but abandoning stimulus might see those gains quickly reversed.
