Today, the Bank of Sweden unexpectedly raised the reference rate from 0 to 0.25%. The market did not expect any changes at this point, which may have surprised some investors. As a result, the Swedish krona (SEK) gained about 1 percent against the euro.
Sveriges Riksbank also signaled the possibility of further increases this year. The central bank's board also decided to immediately stop buying T-bills and reduce the pace of asset purchases in the second half of the year. These decisions could mark a sharp turnaround from the bank's guidance from the previous meeting. It would be aimed at countering soaring inflation and preventing higher prices from becoming entrenched in the economy. The bank's board cited on increased uncertainty in the global economy in the wake of Russia's assault on Ukraine and the return of tight covid restrictions in China. Annual inflation in Sweden rose to 6 percent in March, above expectations and the highest in more than three decades. With monetary policy tightening, the Riksbank expects inflation to fall in 2023 and approach 2 percent in 2024.
The market's reaction seems to be rather abrupt, as in the first moment after the Riksbank's decision the Swedish krona strengthened by around 1 percent against the euro. The EUR/SEK exchange rate thus fell from 10.37 to 10.25. In turn, the USD/SEK exchange rate fell from 9.85 to 9.70. Earlier, the Swedish krona was losing ground to the US dollar. As recently as January, the USD cost SEK 8.20, and in March the SEK 10.00 level was crossed.
The Bank of Sweden therefore appears to be joining the ranks of hawkish global central banks, and its determination to act may be strong. As a result, the impact on the Swedish krona may be significant, hence the USD/SEK or EUR/SEK pairs may draw the attention of some investors.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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