BNY’s Geoff Yu notes that rising Swedish import prices and ongoing softness in the krona are intensifying inflation risks. He anticipates that the Riksbank will adopt a firmer tone on SEK valuations and sees room for markets to bring forward expectations for the next rate increase.
Persistent Inflation Threats Could Prompt Earlier Riksbank Action
“We remain puzzled by the market’s response to the August Riksbank decision. Price action implies the policy board’s decision was dovish, yet Governor Erik Thedéen emphasized that the next move remains a hike. The suggestion that the decision was not ‘clear-cut’ can be interpreted both ways, and we see an equal likelihood that the projected tightening path could be accelerated, given that ‘clear upward momentum’ is evident in inflation.”
“There is a risk that headline inflation in Sweden will rise quickly, amplifying the concerns already present in core inflation. Throughout the recent period of conflict, regulated prices have helped contain the transmission of external cost pressures, allowing Sweden to maintain some of the lowest headline inflation rates in Europe. However, import prices are now beginning to rise, and some pass-through into the broader economy appears unavoidable.”
“EUR/SEK price action has not been supportive, and it is particularly concerning that the KIX import price index, which the Riksbank monitors, has already advanced well beyond the exchange rate. Historically, offsetting strength in the dollar and euro helped smooth out price movements, but the current surge indicates that SEK is being used as a funding currency, which calls for a strong policy response.”
“The Riksbank has previously taken a strong stance on SEK valuations. It stands out as one of the few G10 central banks that openly pursues a stronger exchange rate to help meet its inflation targets. With the KIX repeatedly undershooting projections and contributing to inflation risk, we anticipate more forceful communication going forward, which could eventually translate into policy surprises.”
“At present, a full rate hike is not expected until next year, but the risk-reward profile favors moving that timeline forward.”
