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Sweden's Currency Hits Record Low After Central Bank Raises Rates
Introduction
Sweden's krona hit a new record low on Thursday after the country's central bank raised interest rates and downplayed the possibility of market interventions. The currency fell to 0.0844 krona to the euro and sank against the US dollar. This move came after the Riksbank announced a 25 basis points increase in interest rates.
Interest Rate Hike and Economic Slowdown
The policy rate currently sits at 3.75%, in line with analysts' forecasts. The central bank also projects at least one more rate hike this year. However, the Riksbank stated that inflation is still too high despite falling, mainly due to weaker krona and new service price data. The central bank's Governor, Erik Thedeen, mentioned that he is "very skeptical of currency interventions."
Possible Currency Interventions
While currency interventions are not the initial solution the Riksbank would consider, continued weakness in the krona could push them closer to contemplating intervention. A note by ING highlights that although threatening action is more likely than taking action, the possibility of an intervention in the foreign exchange market remains. Patrik Sandell, financial risk management director at KPMG, suggests that if the krona's decline accelerates, the central bank may have to consider intervention as a tool to stabilize the market.
Tightening Policy
In addition to raising interest rates, the Riksbank announced an increase in the pace of government bond sales, indicating a tightening policy. Starting in September, the monthly bond sales will rise from 3.5 billion krona to 5 billion krona ($324 million).
By implementing these measures, the Riksbank aims to address the weakening krona and combat inflation. However, the effectiveness of these actions remains to be seen, and the central bank continues to monitor the situation closely.
Conclusion
The recent record low of Sweden's krona after the central bank raised interest rates has significant implications for new businesses entering the market. The weakened currency can have both positive and negative impacts, depending on the nature of the business.
On one hand, a weaker krona can make Swedish exports more competitive in international markets. For businesses involved in exporting goods or services, the lower currency value can potentially increase their competitiveness and profitability. Additionally, foreign investors may find Swedish assets more attractive due to the lower prices resulting from the weaker krona.
However, for businesses that rely on importing goods or raw materials, a weaker currency can lead to increased costs. This can strain margins and impact profitability, especially for small businesses with limited resources. It may also make it more challenging for new businesses to establish partnerships or secure supply chains with international suppliers.
Furthermore, the uncertain economic outlook resulting from the interest rate hike and the Riksbank's cautious stance on interventions may contribute to a more cautious business environment. This could potentially impact investment decisions and the willingness of new businesses to enter or expand in the Swedish market.
Overall, new businesses entering the Swedish market in the current scenario need to carefully evaluate the potential impact of a weakened krona and the associated economic conditions. They should consider their business model, competitive landscape, and potential exposure to currency fluctuations to develop strategies that mitigate risks and leverage opportunities presented by the currency situation.
Article First Published at: https://www.cnbc.com/2023/06/29/swedens-krona-hits-new-record-low-as-central-bank-hikes.html
