Swedish Krona: Inflation Risks May Prompt Riksbank to Adopt Hawkish Stance - BNY

The persistent weakness of the Swedish krona is emerging as a new pressure point for the Riksbank. Geoff Yu, an analyst at BNY Mellon, noted that rising import prices combined with a weak krona valuation are increasing upside risks to Swedish inflation, which could force the central bank to adopt a more hawkish tone on the currency issue.

**Source of Inflation Risk: Import Prices and Exchange Rate Pass-Through**

Geoff Yu pointed out that a weaker krona directly raises the cost of imported goods denominated in krona, thereby transmitting to domestic inflation. Although Swedish inflation has previously remained below the central bank's target, the sustained currency depreciation is changing this dynamic. The USD/SEK pair had earlier approached the 9.50 level and is currently trading around 9.5032, with no clear signs of a reversal in the krona's weak trend.

**Central Bank Rhetoric May Shift More Hawkish**

Analysts expect the Riksbank to express more explicit concern over the krona's valuation in its upcoming communications, with language potentially shifting from the previous "neutral observation" to "vigilance over the pass-through of depreciation to inflation." According to BNY Mellon's analysis, the market currently has room to price in expectations of the next rate hike ahead of schedule, implying that the pricing of the rate path could be steeper than previously signaled by the central bank.

**Gap Between Market Pricing and Policy Path**

Previously, the Riksbank kept its policy rate unchanged at 1.75%, with the two rate hikes retained in the repo rate path viewed more as risk warnings than as a set plan. However, if continued krona depreciation pushes up import prices, the central bank could be forced to move rate hikes from a "tail risk" to the base case scenario. The gap between market pricing of the timing of rate hikes and the central bank's official path will be a key variable driving krona exchange rate volatility in the coming period.