MNI INTERVIEW: Risk Of Strong Krona, Weak GDP - Riksbank Head

There is already evidence of U.S.-driven turbulence directing funds into krona assets, raising the risk of a scenario which sees a strong currency even as Sweden's economic growth is weak and the central bank continues to cut its policy rate, Riksbank Governor Erik Thedeen told MNI.

The Riksbank lowered its policy rate by 25 basis points to 2.0% on Wednesday, and released a central projection showing a roughly even chance of one more 25bp cut this year, but one of its two alternative scenarios showed it continuing to ease in 2026 as uncertainty abroad sapped demand and confidence while the krona strengthened, amplifying the downturn.

While stressing that that alternative scenario is much more severe than what has been witnessed so far, Thedeen already sees evidence of these dynamics.

"We have built in this stronger krona, because typically when we have these [downside] scenarios it's weak, but maybe now, with the dollar dynamic and also the krona dynamic we could foresee ... a scenario where we have inflows, capital inflow, and hence, a strong currency," he said in an interview. (See MNI INTERVIEW: Swedish Household Demand Frail - FI Econ Head)

The krona has recently been among the strongest performing currencies, partly reflecting U.S.-policy-linked fund flows. 

"We see some evidence" in mutual funds where "Swedes are selling foreign funds, which is very much U.S. assets, and buying Swedish ones," Thedeen said, adding that similar activity was occurring in other European countries.

"Anecdotally, we also hear that the pension industry ... are preparing decisions to reallocate some of their U.S. exposures ... and that maybe not be Sweden only, of course, but Europe, including Sweden," he said.

Despite its recent rallies, the Riksbank once again stated that the krona is undervalued, a view Thedeen defended.

"We argued [previously] that it was substantially undervalued, and it was also partly flow driven. And you could argue that ... we have been proved right," he said. (See MNI INTERVIEW: Riksbank's Bunge Sees Less Krona Pass-Through)

Still, trends for weak growth and krona strength would have to become more pronounced to make the prolonged rate cutting scenario a reality, he added, despite the reduction in the central projection for 2025 growth in the June Monetary Policy Report to 1.4%.

“Yes, it's weaker than 1.9, that we had in our previous forecast, but it's not a severe downturn," Thedeen said, noting that the alternative scenario envisaged economic contraction. “That's a severe downturn. And then, of course, we have to have substantially different, or more negative sentiment numbers." 

HEADING BELOW NEUTRAL

The Riksbank’s central rate path in its June MPR saw its policy rate at 2.01% by the end of the projection period in Q1 2028, below the 2.25% which is the mid-point of the central bank's revised 1.5-3% range for the neutral rate and which marked the trough of its previous quarterly forecast. Thedeen said that the 2.25% anchor was still in place but the rate will only return to that level beyond the projection’s timeline.

"The rationale is to point to that [2.25%] mid-point in some distant future, and that is actually was what we're doing here. So if you look on the graph we actually [go] down to 1.90, or whatever, and then up and in this three-year [forecast] period it's not up to 2.25, but we have a graph showing that it will go to this interval... We have still this concept that this [2.25%] is an anchor, but we don't want to overdo it - that we need to be back there in three years," Thedeen said.

Before a return to 2.25%, "the whole idea is that we would be in stimulative territory," Thedeen said.

QT WORKING

Despite having lowered its policy rate fairly rapidly compared to other central banks, the Riksbank has managed to press ahead with bond sales and the natural run-off of its securities portfolio, and is on track to complete its quantitative tightening plan this year while other central banks are under pressure to go easy on asset sales.

"We started this with a situation where there was a lack of supply. So ... we are increasing supply in a market that was structurally demanding more supply. In other markets, [the] UK, U.S., they have too much supply, and then they're adding supply. So maybe it's not that we are so brilliant. It's basically, that the environment in Sweden was much more favourable. And hence ... it's been a success," Thedeen said. (See MNI INTERVIEW: Swedish DMO Unfazed By Bond Market Volatlity)