Swedish Krona Falls Following Riksbank's 100bp Hike and Recession Forecast

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The Swedish Krona fell across the board after the Riksbank raised its policy rate by a bigger than expected margin but slashed its growth projections for 2023.

The Riksbank hiked the policy rate by 100bp up to 1.75%, 25bp higher than the market was expecting.

"The Executive Board assesses that monetary policy now needs to act more than was anticipated in June to bring inflation back to the target," read a statement from the Riksbank.

The decision to hike by 100bp comes after Swedish CPIF inflation rose 9.0% in the year to August, its highest level since 1991.

"Acting powerfully and resolutely with monetary policy now reduces the risk that inflation will become entrenched and weaken confidence in the inflation target," said the statement.

The Riksbank released new economic forecasts that revealed unemployment would start to rise in 2023 as the economy shrinks.

The fall in the Swedish Krona in the aftermath of the decision suggests investors are paying attention to the new economic forecasts that show a recession is likely in 2023.

"The Riksbank is far behind the curve and is now trying to catch up. Monetary policy is indeed frontloaded. The bank will do what it takes to bring down inflation, even if it will lead to a recession," says Torbjörn Isaksson, Chief Analyst at Nordea Markets.

The Riksbank's GDP forecast was revised up by 0.9% point for 2022 to 2.7%, but down by 1.5 point to -0.5% for 2023.

It said it expected inflation to return to the 2.0% target by 2024.

This signals that the central bank is nearing an end-point to the rate hiking cycle, a possible contributory factor to the SEK's retreat.

The Pound to Swedish Krona exchange rate is up 0.42% on the day at the time of writing at 12.3693. This takes rates on a typical bank account for SEK buyers to ~12.0120 and rates at payment providers to ~12.3208.

The Euro to Krona exchange rate is up 0.20% at 10.8154 and the Dollar to Krona is up 0.40% at 10.80. The Riksbank's updated guidance on the future path of the policy rate shows a smaller 50bp is now likely in November.

They expect it will continue to rise and peak at just above 2.50% in the second quarter of 2023 and stay at that level for almost a year.

Above: The Riksbank's policy path guidance shows expectations for a higher rate.

The guidance shows the rate path will likely decreases by the end of the forecast horizon to 2.35% as inflation recedes.

"We adjust our forecast and now see a rate hike by 50bp on 24 November (previously 75bp). We keep our view of a 25bp rate hike in February next year and that the policy rate will peak at 2.50%," says Isaksson.

Such a revision is a dovish one from a currency market perspective and therefore helps explains the Krona's decline.

"Further ahead the economic slowdown will become more pronounced, we think. The swift tightening of monetary policy will hit the economy hard. This means that inflation will fall back too," adds Isaksson.

But Knut Hallberg, Senior Economist at Swedbank AB says he sticks to his expectation the Riksbank will hike by 75bp hike in November and 25bp in February.

"We see that inflation will continue to rise in the months leading up to the Riksbank’s November decision, and with other central banks raising rates forcefully, the Riksbank will deem it necessary to go with another large rate hike in November," says Hallberg.

"This would entail that the policy rate peaks at 2.75% at the February monetary policy meeting. We think it will remain at that level until H1 2024, where we then see the possibility of a 25bp cut as inflation slows and growth remains weak," he adds.