Seldom discussed: A strong Krona is good for Sweden
Here’s something the Swedish central bank won’t like to hear — at least right now. A strong krona isn’t something Sweden should fear, according to Hans Lindblad, the Director-General of the Swedish National Debt Office.
“A stronger currency makes Sweden richer, lowers structural unemployment and thereby increases employment in the economy,” said Lindblad, previously one of the top advisers to former Conservative Finance Minister Anders Borg. “It’s a standard result in research, and empirically it’s true also for Sweden, but it’s very seldom discussed.”
Sweden’s central bank has been battling global forces to keep the krona in check and unleashed unprecedented stimulus in an effort to spark inflation, which has eluded its 2 per cent target for more than five years. It has cut rates deep below zero and started buying government bonds. It has warned it may intervene to avoid krona strength even as it recently signalled a bit more willingness to let the krona appreciate.
While Lindblad in an interview last week emphasised that he stays away from making recommendations for what the central bank should do, he says that intervening in the krona is an ineffective tool in trying to steer inflation.
“The belief that you’ll get large effects on inflation by weakening the currency — there’s a tendency to exaggerate it,” said Lindblad, one of just 10 civil servants present at a central bank board meeting called to evaluate the effect from the Riksbank’s latest intervention in 2001. “The experience is rather that temporary variations in the exchange rate have short, small and transitory effects.”
On the political side, the notion that a stronger krona is good for Sweden may find scant backing right now in the current Social Democratic-led government, which depends on a weak currency to support the export-driven economy and help push down unemployment. Against the euro, the currency is about 3 per cent weaker than its average over the past five years.
The debt office head also said that the central bank’s quantitative easing programme — which is targeting to buy more than a third of all outstanding nominal government debt by the end of 2016 — so far has had a limited effect on the market.
“We haven’t seen any problems whatsoever so far” and “we have a very good dialog with the Riksbank because they don’t want to hurt liquidity, and we are very concerned about liquidity because that’s the first question we get from investors,” he said. “But one must remember that the Riksbank now owns a big share and there are quite a few investors who buy to hold on to the papers, so the available amount becomes smaller and smaller.”
Swedish officials are wary of giving the Riksbank recommendations since it was made independent from lawmakers in the 1990s. But according to Lindblad, politicians need to take back the power over currency reserves. The Riksbank, which in recent years has doubled its currency reserve to more than 400 billion kronor ($50 billion), can call on the debt office to borrow funds to increase its holdings without consent from parliament.
The Finance Ministry is looking at whether a 2013 proposal to reduce the size of the currency reserve could be carried out or if it needs to be included in a review of the Riksbank law planned to start later this year.