The Swedish Riksbank since February 2015 began to conduct an unconventional monetary policy in the form of introducing negative interest rates, which were cut to -0.5 percent. From December 2018, the interest rate was -0.25 percent, so that it could be raised to 0.00 percent today.
A series of interest rate cuts in Sweden started in the second half of 2011, when the main interest rate was at 2 percent, could also have been significant for the depreciation of the Swedish krona (SEK). SEK has lost over 35 percent over the past 5 years to USD. In relation to EUR, the decrease was about 25 percent. As a result, in USD/SEK and EUR/SEK we saw levels not seen since 2002 and 2009. As a result, the Swedish Krona has become one of the weakest currencies included in the group of the world's major currencies. An attempt to normalize monetary policy in Sweden may weaken this trend or may lead to larger corrections in pairs with SEK due to the oversold conditions on these markets.
During today's decision, Riksbank decided to raise interest rates second time this year. The central bank raised its main interest rate by 25 bp to zero percent, thus ending nearly five years of the era of negative interest rates. The rationale for this seems to be that inflation has been close to the 2 percent target since the beginning of 2017. In turn, economic outlook and inflation outlook are largely unchanged. Nevertheless, according to the current statement, it seems that we have no hope of continuing the cycle of increases. Policy makers said the interest rate would remain at zero percent in the coming years.
As a result of the decision, the impact on the Swedish krona was limited, as the market expected today's interest rate hike, and the lack of an announcement of further interest rate increase does not seem to have a positive effect on SEK. Thus, the long-term trend of weakening SEK could come to an end, while without further interest rate increases it is difficult to expect a significant reversal.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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