Wednesday, June 20, 2007

Riksbank Unexpectedly Hawkish

Just a few days after I published my analysis of the Swedish Krona did the Riksbank board decide to make it out of date.

Based on public statements from Riksbank chairman Stefan Ingves and vice chairman Irma Rosenberg, I believed that the Riksbank had turn far more dovish than in the past. But either they chose to express themselves in a very misleading way or they have been out-voted by more hawkish board members.

At any rate, their interest rate forecast (i.e. their own forecast of their own future decisions) now says that short-term interest rates will rise to 4% by the end of the year and to 4.4% in 2009, up from 3.5% and 3.75% in their February forecast.

As a result of this, bond yields rose sharply, as did the Swedish krona.

While the year end forecast of 4% interest rates will probably hold true, the 2009 forecast of just 4.4% in short term interest rates is way too low. With next year's housing tax reform further fueling monetary inflation and with previous waves of inflation probably increasingly spreading into consumer prices, there is just no way they could keep interest rates as low as that. Especially since the labor unions have pushed through collective wage settlements so high that the government's strategy of pushing Sweden's large unemployed population into work is at risk, meaning that capacity constraints will appear sooner than otherwise.

Once the Riksbank and currency traders realize this, expect the krona to appreciate significantly.


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