(Bloomberg) -- As the world’s most powerful central banks strike a cautious tone, the man in charge of monetary policy in Sweden has a slightly different message.
Stefan Ingves, the governor of the Riksbank in Stockholm, says that after years of economic expansion, there’s enough pent up spending power to justify raising interest rates this year.
“The Swedish economy and the global economy have by now been very strong for a number of years, so from that perspective there is enough demand pressure in the Swedish economy” to stick with a forecast that rates will rise in the second half, Ingves said in an interview in Stockholm on Wednesday. “Aggregate demand is going to stay above average for the projection period we’re talking about here.”
The Riksbank surprised the market earlier on Wednesday by delivering a more upbeat message than many had expected. Not only did policy makers commit to their planned hikes this year, but they also dropped a mandate that would have allowed Ingves to intervene quickly in the exchange rate as part of a program to revive inflation.
As market participants absorbed the information, the krona spiked, and traded as much as 0.8 percent higher against the euro.
Ingves said the need for sudden and rapid exchange rate interventions no longer exists.
“That mandate was put in place when inflation was much much lower and below our inflation target of 2 percent and at the same time inflationary expectations were also low, so it was a quite dangerous situation for us given where we were back then,” he said. “Now, when inflation is around 2 percent, unemployment is low, the Swedish economy is doing OK, then in that environment there is no need for that mandate at present.”
Jonas Goltermann, an economist at ING, says the latest signals from Ingves and his board point “to a potentially significant shift in the Riksbank’s stance on the krona.”
The upbeat message from the Riksbank comes against a backdrop of increasingly cautious central bankers in Frankfurt and Washington. In the U.S., the Federal Reserve appeared to do a U-Turn late last month, signaling it was putting its rate hikes on hold for now. In Frankfurt, speculation is growing that the European Central Bank will need to respond to the risk of a slowing economy by delaying any planned rate increases into next year.
But Ingves, who raised rates in December for the first time in seven years, signaled on Wednesday that he’s confident Sweden is now on a more stable footing when it comes to inflation after almost half decade of extreme monetary policy.
Part of the reason inflation reached the Riksbank’s target in the first place is thanks to higher import prices following years of negative interest rates in Sweden, with the policy leaving the krona one of the worst performing G-10 currencies of 2019. Even after the December hike, the Riksbank’s main rate is still only minus 0.25 percent.
But according to Nordea Bank Abp, the joy of the krona bulls could be short-lived. Analysts at the bank say that the Riksbank probably won’t be able to pull off more tightening this year.
“The Riksbank will hardly see any domestic reasons to hike rates the coming years and a rate hike remains remote, we think,” said Torbjorn Isaksson, chief analyst at Nordea, in a note.