The Riksbank is concerned by the weak krone exchange rate. The krone has weakened by around 4 percent against the euro, and by just under 6 percent against the dollar this year. If you go further back, the krone’s fall is greater, just over 13 percent against the euro since January 2021, and over 21 percent against the dollar.
When the latest interest rate increase was presented, Riksbank governor Erik Thedéen spent a good while talking about the Swedish krona.
He of course hopes that the krone will be strengthened, and flagged that such a change can be both quick and surprising. It will help in the fight against inflation, according to the Riksbank. But the question is how much a strong or weak krone does to inflation.
Less effect
— It has an effect, absolutely. That is why the Riksbank is worried. But the effect is less than you think, says Jens Magnusson, chief economist at SEB.
His estimate is that the krone exchange rate affects inflation by 0.5 to 1 percentage point. At least when inflation was at its highest. In February this year, inflation, according to the CPI measure, was 12 percent at an annual rate. Now it has fallen back to 7.5 percent in August, according to Statistics Norway (SCB).
Jens Magnusson explains that if the krone exchange rate was so decisive for inflation, then our Swedish inflation would deviate greatly from that of the euro area. But it doesn’t, at least not very much.
Different pattern
Christina Nyman, chief economist at Handelsbanken, however, sees that the pattern may now be a little different than usual.
— There is a rule of thumb that the Riksbank usually talks about, a ten percent weakening of the exchange rate can add 0.5 percentage points to inflation. But now you can think about whether the impact is greater, she says.
We import about a third of what is in the consumer basket that Statistics Sweden uses when inflation is calculated. This could mean that the weakening of the krona has much more impact, according to Christina Nyman.
— The krone exchange rate contributes to inflation, but it is not the main cause. It’s just like in all other countries, when everything opened up after the pandemic, demand increased and there was a shortage. Then came the war. Now the cost increases have spread and affect all prices, says Christina Nyman.
Greater impact
Johan Hassler, professor of economics at Stockholm University, sees, however, that the weak krona has quite a large impact on our inflation now.
— Traditionally, it’s not usually like that. But after the latest inflationary crisis, the impact has become so much greater. The old rule of thumb doesn’t seem to be right, he says.
He believes that the weak krone exchange rate is fueling inflation considerably now.
— Yes, significantly more than the old rule of thumb implies. Maybe several times more than usual.
In general, cost changes seem to be reflected much more quickly in consumer prices now, he thinks.
— There seems to be greater acceptance, there is more understanding of price increases. If, for example, the farmers get increased costs, then you think “well, then they have to raise the prices” says Johan Hassler.