Nightmare for Ingves

Risk aversion and waning confidence that the US Federal Reserve will raise interest rates in September caused Monday’s sharp fall in market interest rates and the US dollar to weaken against other currencies, including the Swedish krona.

The fact that the Swedish currency strengthens when there is turbulence on the financial markets is not something that is appreciated by the Riksbank, which is actively seeking to keep the krona weak to boost inflation.

“It’s a nightmare scenario for the Riksbank that the krona may become a safe haven at times like this,” says Claes Måhlén, chief strategist at Handelsbanken.

Traditionally, the Swedish krona has never been a safe haven, but following the financial crisis of 2008 (ed.) Sweden was viewed as being a refuge where assets could be placed in turbulent times.

Riksbank helpless

Sweden’s central bank, the Riksbank, has had to resort to desperate measures in a bid to raise inflation. The benchmark interest rate has been cut to a negative 0.35% and the central bank is to purchase government bonds to a value of 135 billion kronor, which is equivalent to 4% of GDP. Despite this, inflation has not picked up and the time has come to consider other measures, according to Professor Tore Ellingsen of the Stockholm School of Economics.

The Professor, who is the chairman of the committee that awards the Riksbank’s Prize in Economic Sciences in Memory of Alfred Nobel, advocates an increase in government borrowing as a way of pushing up inflation. The idea is that the state borrows money and passes this on to households in the form of tax cuts or transfers.

“With more money, it becomes worth less, which is the same as inflation. The idea is that households become more interested in goods and services than money,” says Professor Ellingsen.