EUR/SEK: Krona not out of the woods, durable recovery only when inflation outlook clears up – SocGen

Riksbank raises policy rate by 25 bps to 3.75%.EUR/SEK initially rallied to 11.8281 as headlines crossed but it has settled back at 11.76. Economists at Société Générale analyze the pair’s outlook.

Terminal rate raised to 4.1%, 80 bps above February estimate

The Riksbank raised its policy rate by 25 bps to 3.75% and raised its terminal rate estimate by another 40 bps to 4.1%. That’s an uplift of 80 bps since February, an indication of how the central bank is struggling to get a grip on inflation. 

The weaker Krona isn’t making things any easier for the central bank which, like the ECB, was too slow in raising rates from ultra-low levels. The forecast is for the policy rate to be increased at least one more time this year. Inflation is falling but is still far too high. Service prices, like in many other developed economies, are rising unexpectedly rapidly and a weaker Krona, indicates that inflation is declining more slowly than expected. 

The SEK like the NOK is not out of the woods and a durable recovery can only gain traction when the outlook clears up on inflation in the US and the Eurozone and the Fed and ECB end the tightening cycles.